Tag Archives: ROI

Written by Sam Yadegar on Feb 25, 2022

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.

Closeup of man writing arrow up graph increase

Since marketing results are rarely the same month to month, you may want to calculate the ROI over a 12-month period instead. (Image via Rawpixel)

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
  • 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. 

Calculator Calculate Accounting Aplication Concept

ROI is a great metric for long-term strategic planning, while ROAS is excellent for specific ad and campaign measurement. (Image via Rawpixel)

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.

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. 

Sam Yadegar

Sam Yadegar

Sam Yadegar is the co-founder and CEO of HawkSEM. Starting out as a software engineer, his penchant for solving problems quickly led him to the digital marketing world, where he has been helping clients for over 12 years. He loves doing everything he can to help brands "crush it" through ROI-driven digital marketing programs. He's also a fan of basketball and spending time with his family.

Questions or comments? Join the conversation here!

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Written by Sam Yadegar on Nov 2, 2020

Calculating a more accurate look at the revenue per lead for your search engine marketing (SEM) programs

Here, you’ll find:

  • How to determine the true value of your leads
  • The benefits of aligning sales and marketing strategies
  • The best results-driven reports to develop
  • Why a lead-scoring system is key

Put on your blue-light-blocking glasses, crack those knuckles, and fire up your calculator. It’s time to do some math.

Being able to calculate your pay-per-click strategy’s return on investment (or PPC ROI) is an important part of running any paid search marketing program. And knowing the true value of the leads you’re currently bringing in can help you make more informed strategy decisions. More than that, it can help you optimize your PPC efforts. As a result, you can generate more leads in the future — and who doesn’t want that? 

ppc lead value blog - hawksem

By connecting your marketing and sales strategies in a meaningful way, you can better leverage the power of the data you have. (Image via Unsplash)

Calculating revenue per lead, however, isn’t always as simple as dividing the cost per lead by the revenue earned per lead.

To find the true revenue per lead, you need to set up a system that connects high-quality leads to the dollar amount spent on each individual lead. Luckily, you don’t have to rely only on intuition and estimations. 

By connecting your marketing and sales strategies in a meaningful way, you can better leverage the power of the data you have.

Where to begin

At face value, the formula for calculating revenue per lead is fairly simple:

Total revenue generated ÷ Total number of leads = Average revenue per lead

However, finding the average returns isn’t necessarily a long-term recipe for success. You need to be able to factor in PPC site traffic and customer relationship management (CRM) data as well. This will allow you to see which leads in the CRM are high-valued opportunities or closed sales.

You also want to decide how to measure quality leads. Ideally, you want to attract those who move through the funnel quickly and/or convert for the highest customer lifetime value (LTV).

Alternatively, some experts recommend this formula for calculating return on ad spend (ROAS):

Total revenue generated by ads ÷ cost of ad spend = ROAS

It’s worth noting that calculating PPC ROI in this way isn’t a one-size-fits-all method. For example, if you sell high-end software or services, your sales cycle may be anywhere from six months to two years. This means that just getting a handful of sign-ups or registrations per month can be sufficient. The potential revenue from those leads would cover the entire SEM program cost.

But you don’t want to necessarily go all-in on whatever strategy brought those leads in just yet. That’s because the data set is too small to be able to measure confidently.

Get all of your variables in place

For a more accurate look at lead value, it’s a good idea to develop a lead scoring system with robust CRM and keyword tracking technology. You can do this either in-house or with a PPC agency. This way, it’ll be easier to connect specific paid search site visitors with sales and lead value.

You can track “big data” as well as input subjective data about personal experiences with the lead for added context. By tracking which customers stood out as exceptionally good leads throughout the sales cycle, you can connect each with corresponding PPC site traffic data and see what patterns emerge.

If a specific keyword or ad group drove the highest value sales, it might be worth allocating more of your budget there. Alternatively, if your highest LTV is coming from desktop PPC leads, shift more budget to desktop over mobile campaigns.

Build your reports

The next step is to develop PPC ROI reports that focus on what you care about: real results. If you don’t already, it’s a good idea to start tracking data year-over-year as well as monthly. Instead of only relying on statistics or intuition, this lets you combine the science and the art of effective digital marketing to drive more ROI.

Oftentimes, marketers don’t properly connect revenue earned to cost per lead. Looking at the average ROI for any given PPC campaign is not the best way to derive meaningful insights.

For PPC ROI, seasoned experts know it’s best to use a results-driven approach and work backward instead of using a “guess-and-check” approach.

ppc lead value blog - hawksem

Putting a system in place that allows you to connect leads and actual sales values with your PPC strategy helps you properly calculate the cost per lead. (Image via Unsplash)

Get solutions to common PPC problems with Our Ultimate Guide to Problem-Solving for Your PPC Program and Getting the ROI You Deserve.

Calculate anticipated ROI before anticipated site traffic

Judging your generic site traffic from PPC campaigns can have some pitfalls. To improve your bidding strategy, you want to work backward here as well by scoring leads and using “money keywords” for results-oriented PPC campaigns.

When you take measures to get highly qualified leads from the first click, you connect marketing strategy with sales strategy in a way that is more cohesive and aligned.

Get the final results and know your cost per lead

Putting a system in place that allows you to connect leads and actual sales values with your PPC strategy helps you properly calculate the cost per lead. Return to the simple equation of:

Total revenue generated ÷ Total number of leads = Average revenue per lead

The takeaway

By taking a scientific approach to calculating revenue (with an appropriate amount of anecdotal evidence based on recent experiences with clients), you can feel confident that you have a handle on your true lead value.

Need more PPC guidance? That’s what we’re here for.

This post was originally published in August 2014 and was updated in November 2020.

Sam Yadegar

Sam Yadegar

Sam Yadegar is the co-founder and CEO of HawkSEM. Starting out as a software engineer, his penchant for solving problems quickly led him to the digital marketing world, where he has been helping clients for over 12 years. He loves doing everything he can to help brands "crush it" through ROI-driven digital marketing programs. He's also a fan of basketball and spending time with his family.

Questions or comments? Join the conversation here!

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