ROI and ROAS are vital metrics to use in the marketing industry but, I expect you already knew that.
It can be stressful trying to work out which one to use and you could even be thinking that it might just be easier to chuck everything out the window!
Having the knowledge of which metric to use and when is important to the success of your business.
But you don’t need to stress! Here are the formulas and explanations of both ROI and ROAS to help you understand which one is the perfect match for your business.
ROI (Return on investment)
This metric is used to decide the effectiveness of a campaign, it is centred on business and is a strategy metric.
It takes your earnings into account after expenses are deducted.
It can also be used for an offline campaign, for example: television and radio ads.
ROI is most effective when measuring how ads contribute to a company’s income.
The ROI gives you the amount you make after paying your expenses, it’s only purpose is to determine if the campaign is worth the investment or not and can be used either after or before the campaign has gone live, answering the main question: is it worth it?
The formula for ROI is:
(Gains – cost) / cost
ROI should be taken off the full expenditure as it already includes all the costs of everything going into the campaign.
The real value of ROI for marking campaigns – Check this article out for more information.
ROAS (Return on ad spend)
ROAS is the ratio comparing how much you spend to how much you earn.
It determines the efficiency level and revenue of your marketing channels.
ROAS optimises to a tactic and is an advertiser centred metric. This focuses on growing business and measures revenue against the money spent on advertising campaigns.
The formula for ROAS is:
What you made / what you spent
When calculating ROAS for an advertising campaign, make sure you consider:
- Vendor and partner costs. These include Commissions and fees on each individual campaign as well as salaries for those working in house on the campaign.
- Affiliate commission costs. For example, payment transaction fees and network transaction fees as well as commission for affiliates.
- Returns. Including, impressions and clicks generated from the advertising campaign. Total number of impressions by each individual advertising campaign, cost per thousand impressions and total cost per click.
ROAS is done properly when you ignore certain costs for example: Salaries and manufacturing.
It is also best when used for digital goods.
However, if you are selling physical goods you must remove the cost of those goods from the revenue created.
ROAS is not done properly unless this is taken into account.
You must remember that it is possible for one advert to have a higher ROAS then another advert, but have fewer profits.
When to use them
If you are selling a service or your goal of the advertising campaign is to raise awareness, ROAS would be good for you to use. This is because it helps to evaluate which advertising method works best for you.
If you are selling physical goods, you will need to think about if there are any production costs. You can assess the advertisement spending by calculating the ROI.
ROI calculates overall profits taking into account all expenditures meanwhile, ROAS will tell you if your advertisements are working and are based on revenue not profit and therefore both offer different approaches to digital marketing.
Which one would you most likely use for your business?