ROI (Return on Investment) and ROAS (Return on Ad Spend) are essential metrics in the marketing world – but understanding when and how to use them can feel overwhelming.
You might even wonder if it’s worth the stress. But don’t worry! By understanding the role of ROI and ROAS, you’ll know exactly which one to use to drive your business forward. Here’s a simple breakdown to help you decide.
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’s particularly valuable for offline campaigns such as TV or radio ads and is the go-to metric when assessing how campaigns impact a company’s bottom line.
Overall, ROI helps answer the big question: Is this campaign worth the investment? It can be calculated either before launching a campaign to forecast success or after to evaluate performance.
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.
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.
ROAS is most effective for evaluating digital goods or campaigns. However, if you’re selling physical products, don’t forget to deduct production costs from the revenue before calculating. ROAS is not done properly unless this is taken into account.
It’s also important to note that a higher ROAS doesn’t always mean higher profits. For example, one ad may generate better efficiency, but another might deliver a greater overall return.
When Should You Use ROI or ROAS?
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.
Partner with Nivo for Data-Driven Success
Still unsure about which metric to prioritise? Contact us at Nivo Digital, where we specialise in helping businesses like yours make sense of complex data, optimise campaigns, and achieve measurable results.
Whether it’s ROI, ROAS, or a complete marketing strategy, we’re here to guide you.