In the ever-evolving world of digital marketing, success is often determined by the ability to navigate a minefield of metrics and data points. Two of these crucial metrics that take centre stage are ROI (Return on Investment) and ROAS (Return on Advertising Spend).
While both provide a strong insight into campaign effectiveness, they serve distinct purposes and offer unique perspectives on the performance of digital marketing efforts.
In this blog, we'll unravel the differences surrounding ROI and ROAS and explore how to leverage them for optimal advertising success.
ROI and ROAS defined
Let’s start with the basics.
What is ROI?
Put simply, ROI (Return on Investment) is a metric that takes both revenue and costs into account to evaluate the profitability of an investment.
Here’s a simple formula that you can use to work out your ROI:
ROI = (Net Profit / Net Spend) x 100
What is ROAS?
ROAS stands for “Return on Ad Spend”. It’s used to help determine the efficiency of your online advertising campaign by calculating the amount of money your business earns for each pound it spend on advertising.
You can use the following formula to calculate your ROAS:
ROAS = (Ad Generated Revenue / Advertising Spend) x 100
The difference between ROI and ROAS
When comparing ROI with ROAS, there are a couple of major differences.
Firstly, ROAS looks at revenue generated, rather than profit for the business. Secondly, ROAS only considers direct spend of the given advertising campaign, rather than any other costs associated (such as personnel, software, or overhead expenses).
In essence, ROAS is primarily concerned with the immediate effectiveness of adverting efforts. On the other hand, ROI takes a more comprehensive view. Not only does it consider the revenue generated but also factors in all costs associated with the campaign.
Examples of ROI vs ROAS
To help illustrate the differences between ROI and ROAS further, let’s take a look at some hypothetical scenarios.
ROI vs ROAS: Company X
Company X has started selling T-shirts through their E-commerce store and have generated £50,000 in revenue directly from an advertising campaign. The advertising spend totalled to £10,000. But in addition to these advertising costs, Company X has other operating expenses, totalling to an additional £30,000.
To assess the effectiveness of Company X’s campaign, we can calculate both ROI and ROAS. Here’s how:
ROI = (£50,000 - £40,000) / £40,000 x 100 = 25%
ROAS = (50,000 / £10,000) x 100 = 500%
In this scenario, the ROI is 25%, meaning that for every £1 spent on the campaign, Company X earned £1.25 in profit. On the other hand, the ROAS is 500%, suggesting that for every £1 spent on advertising, the company generated £5 in revenue.
But let’s take a look at another example.
ROI vs ROAS: Company Y
Imagine Company Y makes £100,000 in revenue selling watches online, having only spend £30,000 on ads. But in addition, the cost of software, specialist personnel and other overheads totals to £80,000. In this case, you can use the ROI and ROAS formulas to work out exactly how effective (or ineffective) Company Y’s campaign is compared to Company X’s.
ROI = (£100,000 - £130,000) / £110,000 x 100 = -27%
ROAS = (100,000 / £30,000) x 100 = 333%
In this scenario, the ROAS provides a positive figure, indicating that the ads themselves are effective. However, the ROI reveals that the overall project isn’t making Company Y any money. In fact, they’re making a loss.
That’s why it’s so important to look at both ROI and ROAS when running digital marketing campaigns. These metrics offer a distinct perspective on the performance, and most importantly, the profitability of your advertising efforts.
Should I use ROI or ROAS?
When comparing ROI to ROAS, it's crucial to keep in mind that it's not a matter of choosing one over the other. While ROI helps to assess long-term profitability, ROAS is better suited for refining short-term campaign tactics.
To create a successful digital marketing campaign, you should employ both ROI and ROAS calculations.
Leveraging ROI and ROAS for digital marketing success
Here at Bigger Picture, we understand the importance of using both ROI and ROAS metrics strategically to ensure your advertising campaigns are not just effective but also profitable. As official Google Partners, our team of experts have what it takes to drive the success of your PPC campaigns.
Visit our digital marketing page for more info on our services or get in touch with our friendly team today. We are always happy to answer any questions you may have and look forward to taking your brand to the next level.