What are the differences between ROAS and ROI?
When it comes to determining if the digital marketing and advertising spend you are putting into product and/or service is effective, ROAS and ROI are both common measurements of evaluation. While both ROAS and ROI are indicators of your return, when analyzed, both can vary drastically.
ROAS stands for “return on ad spend,” i.e., how much are you getting back for the amount you are spending on advertising? ROAS provides a quicker formula and a broader measurement of gross revenue by looking specifically at the advertising costs; it doesn’t account any other expenses outside the ad spend.
While ROAS focuses on gross revenue, ROI looks at actual profit. ROI stands for “return on investment.” ROI is a macro metric that is designed to determine the overall investment—and if it is all worth it. ROI goes beyond the cost of an ad/campaign and looks at all costs related, whether it’s labor costs, production costs, shipping, software, etc. Unlike ROAS, ROI looks at the return on money only after all expenses are deducted.
ROI is excellent for providing insight on the big picture, the overall profitability. ROAS is useful for comparing individual strategies and platforms. When it comes to both ROI and ROAS, you want the metric to equal at least 1 meaning that you are breaking even. A number less than 1 or negative means that you are losing money. A number higher than 1 means that you are generating revenue or profit; the higher the number, generally the better.
Both ROAS and ROI metrics are best looked at after a campaign has ended to more effectively evaluate because you will have the most accurate and updated information to use for your calculations. Of course, when starting out and trying to determine where and how to spend and allocate advertising money, you might need to predict your ROAS and/or ROI. However, the best metrics are the ones with the most accurate numbers plugged into the formulas. When a campaign has completed and you are able to accurately calculate the ROAS and/or ROI, you can then determine your return and consequently, decide how and where you can most effectively spend your money.
How do you calculate ROAS?
ROAS is calculated by dividing the revenue from an ad campaign by the cost of the respective ad campaign. Doing so will inform you how much your company will earn for each dollar it spends on advertising.
ROAS = revenue from ad spend/cost of ad spend
For instance, you have a product that you sell for $200, and you decided to spend $100 on a Facebook ad campaign. The campaign results in 5 sales equating to $1000 in total sales.
ROAS = $1000 sales/$50 ad spend = $10
Therefore, for every $1 you spend with this current ad strategy, you are getting $10 of revenue.
To improve and increase and your return on ad spend, you would either need to decrease your ad spend or increase your revenue. If you are not getting a positive ROAS metric, you may either be spending too much on your advertising or you may be not charging enough for your product/service.
How to calculate ROI?
ROI is calculated by dividing the net profit by the net spend. This will provide you with the amount you profit in comparison to the amount you are putting into the production and advertising.
ROI = (Revenue – cost)/cost
Remember that when it comes to calculating costs for ROI, all cost factors are included beyond an ad spend. One must consider and include labor costs, production costs, software/tools, etc.
Using the same previously mentioned $200 product, let’s add to the context that it costs $100 to produce each product. You spend $100 on a paid Facebook post which also results in 5 sales equating to $1000 in total sales.
ROI = ($1000 total sales - ($500 production costs + $100 ad cost))/($500 product costs + $100 ad cost)
ROI = $400/$600 = 2/3 or .67
In the case of ROI, for every $1 you are spending overall—in both production and ads, you are only getting back .67.
To improve or increase your return on investment, you would need to either increase your revenue or decrease your costs.
When is it most appropriate to use ROAS?
ROI is a more sustainable measurement when it comes to a long-term overall investment. Because ROI looks at long-term, overall investment, ROAS is a better metric if you need to calculate and look at on a day-to-day basis. ROAS is also good to utilize if you are trying to calculate ROI but don’t have access to all the production or miscellaneous costs. Needing only the amount of revenue being generated and the amount of advertising money being spent, ROAS is an easier metric to calculate. Consequently, if the product or service that you are selling does not have a lot of costs outside of the advertising spend, ROAS could easily be an appropriate metric to use.
ROAS is an excellent metric for comparison if you are currently trying to determine which platform or campaign might be the most efficient and effective. Short-term, ROAS can be a good metric to evaluate the effectiveness of advertising spending. Or, if advertising spend is the only budget you care about, ROAS is the most appropriate metric to use.
Why is ROAS a better measurement of success?
ROAS can be a better measurement of success when comparing the revenue of different campaigns. By looking at the ROAS of individual campaigns, one can better analyze the performance and results of each—and know which ones have better performance and are proven to generate more revenue. As a result, you will know which campaigns and strategies you should be prioritizing and implementing.
That being said, it’s most effective to use ROAS for advertising comparison if there aren’t too many different factors involved. For instance, an effective use of ROAS comparison would be if you were promoting Product A with a variety of advertising platforms with X amount of money. Then you compare the different ROAS, see which platform is resulting in the highest ROAS, and determine which platform is best for advertising Product A.
Another productive ROAS measurement of success would be to advertise a variety of different products with X amount of money using the same advertising method. Then you can compare the resulting ROAS and determine which product is best, or most appropriate, to advertise with such method.
While you still can try to compare ROAS for different products, advertising methods, and spends, similarly to a science experiment, it's best to have as close to an independent, a dependent, and a controlled variable. If you have too many variables, even if you have a positive or high ROAS, you might not be able to accurately determine what is contributing to the success. This is important to consider if you’re working with a budget.
The pros and cons of ROAS
ROAS looks only at the gross revenue while other metrics that resulted from a campaign such as clicks and impressions, and consequently, average cost per click and average cost per impression, aren’t taken into account. By looking only at concrete revenue metrics, ROAS will also ignore other important measurements of successes such as conversion, engagement, followers, brand awareness, etc.
ROAS is great for determining tactics because it is measured for specific ads and campaigns. If you are trying to determine which campaign is best for generating revenue, ROAS is great to help you compare and evaluate. Whether you are trying to determine the effectiveness of a specific platform, ad, or campaign—or even the best product for a specific method of advertising, ROAS is a good metric to use for comparison.
While ROAS provides a correlation between advertising spend and revenue, it does not guarantee your product/service is actually making you money. A high return on ad spend does not necessarily equate to profitability so it’s important to keep in mind that a high ROAS metric does not guarantee success. If the product you are selling has a lot of associated production costs, calculating ROAS might not be the most logistical or sustainable method to determine your revenue long-term. If there are too many additional costs, they may outweigh the revenue generated and actually not be as successful of a campaign as initially thought.
ROAS is an excellent and important metric to look at when evaluating your advertising spend and methods. It is very insightful to look over ROAS numbers, but it should be one of many factors looked at it when determining overall performance.
Contact us to learn more about your ROAS and ROI metrics and comparisons.