Let’s dive into how return on Investment (ROI) and return on ad spend (ROAS) are similar, ways they’re different, and why they’re both worth monitoring.
Here you’ll learn:
- How ROI and ROAS work
- Differences and similarities of ROI and ROAS
- Ways to refine “good” ROI and ROAS
- Why it’s wise to keep an eye on both metrics
Ideally, every dollar you invest in advertising should help you make more money.
Calculating how well your investments are working involves monitoring two main metrics: ROI and ROAS.
Each one can give you an idea of your marketing campaign’s efficiency and help you make timely adjustments. While these metrics are hardly the only indication of your strategy’s strengths and weaknesses, they can be key in helping you avoid unnecessary expenses.
Let’s take a closer look at the differences and similarities of ROI and ROAS.
What is ROI in marketing?
ROI in marketing demonstrates how effective your investments in the marketing campaign are. These investments include:
- Marketing automation tools
- The marketing team’s salary
- Website maintenance costs
- Digital ad spend
- Website design costs
- Campaign analytics
- Public relations
In marketing, ROI can be used to justify marketing spend and budget allocation for current and future tactics.
The simple formula for calculating marketing ROI is:
(Sales growth – marketing costs) / marketing costs x 100% = marketing ROI
For example, if in any given month your sales grew by $1,000 while your marketing costs were $800. That means your ROI is 25% because (1,000 – 800)/800 x 100 = 25%.
Keep in mind that marketing ROI doesn’t always paint the full picture. It works on the assumption that marketing is the only factor affecting sales growth. In reality, many other factors can have an impact on this indicator.
Since marketing results are rarely the same month to month, you may want to calculate the ROI over a 12-month period instead. This could give you a more accurate look at performance.
Even though it doesn’t always tell the whole story, marketing ROI is still an important indication of how well your campaign is working. Coupled with other marketing metrics, calculating ROI can help you understand whether adjustments need to be made.
What is ROAS?
ROAS demonstrates how effective your investments in digital advertising have been. Besides measuring ROAS of your entire campaign, you can use this metric to evaluate the efficiency of specific ads and tactics.
The investments made into the advertising include:
- Paid ad bids
- Vendor costs
- Ad operation costs
The formula for calculating ROAS is:
ROAS = (Revenue you receive from ads/costs of ads) x 100%
Tracking return on ad spend across your marketing tactics and campaigns can help you measure and compare the effectiveness of advertising efforts separately and together.
Coupled with other metrics, such as cost per acquisition (CPA), cost per click (CPC), and cost per lead (CPL), ROAS can provide an accurate look at how well your digital advertising strategies are working.
What is a “good” ROI or ROAS?
There isn’t an all-purpose answer to what is considered good ROI or ROAS. Rather, each company has its own ROI goals that depend on factors like:
- Cost structure
- Profitability margin
- Type of strategy
- Marketing cost attribution
Generally, a good ROI is considered to be anything over 100%, or more than $1 return for each dollar you spend. However, many companies aim for an ROI of 500% or higher.
When it comes to ROAS, the answer is the same. ROAS is affected by elements including profit margins and operating expenses. According to BigCommerce, a common ROAS benchmark ratio is 4:1, or $4 worth of revenue for every $1 in ad spend.
ROI and ROAS: Similarities
Both metrics can help you get a better understanding of how profitable your marketing campaign is. Monitoring them allows you to make timely adjustments and gain insight into the future of your strategies.
ROI and ROAS show you how marketing affects the company’s revenue.
Need more help understanding your marketing metrics? Let’s chat.
ROI vs ROAS: Differences
While both metrics help calculate the effectiveness of the marketing campaign, they aren’t the same.
ROAS measures the gross revenue generated by the money you spend on the campaign. Meanwhile, ROI accounts for net revenue, or the money you make after all expenses.
ROI helps you understand how well the entire marketing campaign is working and whether it’s worth further investment. ROAS demonstrates the effectiveness of the ad campaign or tactic in isolation.
For example, you spend $10,000 on paid ad bids and receive $20,000 in revenue. The ROAS of this campaign is 200%. But once you factor in expenses like salaries ($8,000) and landing page design ($5,000), the ROI of this can end up in the negative.
In this situation, you can see how effective the paid ad campaign is in isolation. However, the size of other marketing expenses makes it less effective for the company’s bottom line.
ROAS is a better metric for the short-term evaluation of specific tactics. You can measure your paid ad campaign’s ROAS every month and see how it changes over time. ROI is a long-term success metric. It may fluctuate wildly from month to month but provide a more accurate annual reading.
Return on ad spend is a straightforward metric that compares your company’s earnings from advertising to advertising costs. You get an understanding of how much the particular campaign earns without considering a wide range of marketing expenses.
ROI allows you to evaluate the profit with the consideration of marketing expenses. It’s a more comprehensive way to gauge the investment’s value.
Both ROAS and ROI calculate the return on investment. However, ROI is a business metric while ROAS is a solely marketing metric.
ROI is a great metric for long-term strategic planning, while ROAS is excellent for specific ad and campaign measurement.
ROAS is a useful metric for understanding which advertising tactics are effective for sales generation and growth. Meanwhile, ROI can determine which methods are more productive for generating higher profits for the company.
While marketers can take advantage of both metrics to evaluate their campaigns, it’s imperative to understand what each of them shows.