Return on Investment (ROI) measures profitability, whereas Return on Ad Spend (ROAS) measures campaign effectiveness. Here’s why you should be looking at both.
Here you’ll learn:
- Definitions for both ROI and ROAS
- Similarities and differences of ROI and ROAS
- Ways to refine “good” ROI and ROAS
- Which one you should use (and when)
Ideally, every dollar you invest in advertising should drive conversions and 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.
(Image: HawkSEM)
ROI and ROAS: Similarities
Both ROI and ROAS metrics can help you get a better understanding of how profitable your digital marketing campaign is. Monitoring them allows you to make timely adjustments and gain insight into the future of your strategies and initiatives.
ROI and ROAS show you how marketing affects the company’s revenue.
Key similarities:
- Both ROA and ROAS assess the performance of investments or expenditures.
- Both are expressed as percentages, making them easy to compare and the results easy to analyze.
- They both can help in decision-making by evaluating the efficiency and effectiveness of financial activities.
ROI vs. ROAS: Differences
While both metrics help calculate the effectiveness of a marketing campaign, they aren’t the same .
Both assess campaign performance, but ROI considers all costs and gains, while ROAS only looks at advertising costs and revenue.
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, let’s say you spend $10,000 on paid ads 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 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 advertising 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 marketing investment. However, ROI is a business metric while ROAS is a solely marketing metric.
Key differences:
- ROI is a broader financial metric used for any investment or business activity, while ROAS is specific to advertising and marketing efforts.
- ROAS focuses only on advertising costs and the revenue generated from advertising, while ROI considers all costs and gains related to an investment.
- ROI can be positive or negative (indicating profitability or loss), while ROAS is typically considered successful when it exceeds 100%. This indicated a return that surpasses the advertising cost.
What is ROI in marketing?
ROI measures 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
ROI can be used to justify marketing spend and marketing budget allocation for current and future tactics.
The ROI formula is simple:
(Revenue – all marketing costs) / all marketing costs x 100% = marketing ROI
For example, if in any given month your sales are $6,000 while your marketing costs are $800. That means your ROI is 650% (or 6.5x) because (6,000 – 800)/800 x 100 = 650%.
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, ROI calculations 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 online advertising include:
- Paid ad bids (PPC platforms such as Google Ads, paid social media ads, etc.)
- Vendor costs
- Ad operation costs
The ROAS formula 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), conversion rate, and cost per lead (CPL), ROAS can provide an accurate look at how well your digital advertising strategies are working.
What is a good ROAS or ROI?
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
- Industry
- 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 is a great metric for long-term strategic planning, while ROAS is excellent for specific ad and campaign measurement. (Image via Rawpixel)
Which one should I use?
Whether you should use ROAS or ROI depends on your specific goals and the nature of the investment you’re evaluating. Here’s the long and the short of it:
Use ROI when:
- You want to assess the overall profitability of an investment/business activity, and consider all associated costs and revenues.
- Your evaluation involves a wide range of factors beyond just advertising (think operational expenses, capital investments, etc.).
- You need a holistic view of your business’s financial performance.
Use ROAS when:
- You are specifically evaluating the effectiveness of your advertising and marketing campaigns.
- You want to understand how well your ad spend is translating into revenue.
- Your primary focus is to optimize marketing strategies and budget allocation.
In many cases, marketers will use both to gain a comprehensive understanding of their financial performance. The choice ultimately depends on your specific objectives and what aspect of your business or investment you need to analyze.
The takeaway
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.
This post has been updated and was originally published in February, 2022.
