In the second quarter of 2024, U.S. consumer optimism fell to similar levels to that of 2023. The year 2023 had low levels of consumer confidence, a trend continuing downwards since 2021. Pre-pandemic levels had a consumer confidence index approximating 135-138. From 2021 to 2024, the trend has been downward, resulting in an index of ~115. According to a McKinsey Consumer Wise Global Sentiment Survey, the survey data indicates that consumers are expected to increase their spending over the next few months on essential items, such as gasoline due to the inflationary pressures over the past few years. Shifting dollars to essential items is expected to lead to a simultaneous decrease of spending in categories for “non-essential” or “semi discretionary” items. Consequently, this will negatively affect most e-commerce businesses directly resulting in a negative impact on ROAS.
What is ROAS? ROAS, return on ad spend, is a financial metric that is commonly used in e-commerce to evaluate the effectiveness of a marketing campaign. ROAS can also be used to compare the cost effectiveness and efficiencies of one marketing campaign compared to another. It is calculated by dividing revenue dollars earned from marketing over advertising dollars spent.
Depending on the niche an ecommerce business operates in, consumer sentiment and its relationship to revenues can vary greatly by business. Considering the report and the pessimistic trends in consumer spending/sentiment, individuals are spending less on non-essential items and are putting their dollars toward essential goods due to price increases. This generally means that consumers will be less receptive to marketing campaigns from businesses and decide to save their money for more non-discretionary goods and services. The possibility of less revenue from marketing campaigns will lead to less ROAS over time.
To curtail these adverse effects, e-commerce businesses owners need to design an agile and flexible marketing campaign that is based on performance metrics and consumer feedback. Owners need to ensure they are not wasting their hard-earned money on advertisements that are generating a negative return on investment.
Working with a firm, like Profitability Partners, can allow a business to effectively spend and manage ad-buying and ROAS to allow for efficient spending in a period of negative consumer trends.