Advertisers have a massive (and often overwhelming) choice of metrics with which to measure the performance of their campaigns.
Digital marketing is an acronym-filled business. Two acronyms you’ll hear time and time again are ROAS and ROI.
In this article we’ll deep dive into each and explain the major differences, how they are calculated, the pros and cons of each metric, and when to best use them to measure performance.
What is ROAS
ROAS stands for Return On Ad Spend, and it is a crucial metric for advertisers aiming to assess the effectiveness of their digital advertising campaigns. ROAS specifically focuses on the return generated from a specific advertising channel or campaign in relation to the amount spent on that channel. In simpler terms, it measures how much revenue is earned for every dollar spent on advertising.
The formula for calculating ROAS is straightforward:
The ROAS formula
ROAS = Revenue from ads / Ad spend
For example, if a performance marketing campaign generates $10,000 in revenue and the cost of the ads was $2,000, the ROAS would be 10,000 /2,000=5. This means that for every dollar spent on advertising, the campaign generated $5 in revenue.
The key advantage of ROAS lies in its specificity. By isolating the performance of individual advertising channels or campaigns, advertisers can fine-tune their strategies based on what is delivering the best return. This granularity allows for more targeted and efficient allocation of budget, ensuring that resources are directed towards the most profitable channels.
However, it’s important to note that ROAS doesn’t provide a complete picture of overall business profitability. It’s a channel-specific metric, and a high ROAS on one channel doesn’t necessarily mean the entire business is thriving. Advertisers should use ROAS in conjunction with other metrics, such as customer lifetime value (CLV) and overall return on investment (ROI), for a more comprehensive assessment of their marketing efforts.
What is ROI
While ROAS focuses on the return generated specifically from advertising efforts, Return on Investment (ROI) provides a broader perspective by evaluating the overall profitability of an entire business or a particular investment. ROI takes into account all costs associated with running a campaign, not just direct advertising costs.
The ROI formula
ROI = Net profit / Total investment x 100
In this formula:
Net Profit refers to the total revenue generated minus all expenses, including operational costs, marketing production costs, and advertising expenditures.
Total Investment encompasses all costs associated with running the business, such as initial investments, operating expenses, and advertising spend.
For instance, if a business generates $50,000 in total revenue, and the total investment, including operational costs and advertising spend, is $30,000, the ROI would be calculated as follows: (50,000−30,000 / 30,000) x 100 = 66.67%.
This indicates that for every dollar invested in the initiative, a return of $1.67 is realized.
Unlike ROAS, which is channel or campaign-specific, ROI provides a comprehensive view of business performance, considering all aspects of income and expenditure. While ROAS is valuable for optimizing specific advertising strategies, ROI is essential for understanding the overall health and profitability of the business.
Key differences between ROI and ROAS
1. Scope of Measurement:
- ROAS: Primarily focuses on the performance of specific advertising channels or campaigns.
- ROI: Takes into account the overall profitability of the entire business, considering all costs and revenue streams.
- ROAS: Offers a granular view, allowing advertisers to optimize individual campaigns for better returns.
- ROI: Provides a holistic perspective, encompassing more aspects of business operations and investments.
3. Calculation Basis:
- ROAS: Calculated by dividing revenue from ads by the ad spend.
- ROI: Derived by subtracting all marketing costs from total revenue, then dividing by the total investment.
- ROAS: Ideal for fine-tuning advertising strategies and optimizing marketing budget allocation.
- ROI: Essential for assessing overall marketing health and profitability, guiding strategic business decisions.
When should you use ROAS vs ROI
1. Use ROAS When:
- You want to optimize and maximize the effectiveness of specific advertising channels.
- Fine-tuning campaigns based on their individual performance is a priority.
- Channel-specific insights are crucial for budget allocation and direct spend decisions.
2. Use ROI When:
- You need a comprehensive view of overall marketing performance.
- Assessing the profitability of the entire marketing, beyond direct advertising costs, is essential.
- Making strategic decisions that impact the entire organization is a priority.
How are ROAS and ROI metrics used
1. ROAS in Marketing:
- Example: A clothing brand runs two Facebook ad campaigns. Campaign A has a ROAS of 4, meaning it generates $4 for every $1 spent. Campaign B has a ROAS of 2.5. The brand decides to allocate more budget to Campaign A to maximize returns from this higher-performing channel.
2. ROI in Marketing:
- Example: A comprehensive marketing ROI analysis reveals that despite a high ROAS in digital advertising, the overall business ROI is lower due to high operational costs. The business decides to optimize operational efficiency to improve the overall return on investment on these digital ads.
Understanding the nuances between ROAS and ROI empowers marketers to use these metrics strategically. While ROAS guides advertising budget optimization, ROI provides a broader business perspective, ensuring marketing costs align with long-term profitability goals.
Balancing the use of both metrics allows for a more informed and effective approach to digital marketing.
What are good ROAS and ROI benchmarks?
1. ROAS Benchmarks:
- Industry Variances: ROAS benchmarks vary across industries. E-commerce might aim for a higher ROAS compared to industries with longer sales cycles.
- E-commerce: Typically, e-commerce businesses aim for a ROAS between 400% and 800%. This means for every $1 spent on ads, the business generates $4 to $8 in revenue.
- Retail: In the retail sector, a ROAS of 300% to 500% is often considered strong, reflecting a healthy return on advertising investment.
- SaaS (Software as a Service): SaaS companies might target a ROAS of 200% to 400%, given the recurring nature of subscription-based revenue.
- Platform-Specific Benchmarks: Different advertising platforms have distinct average ROAS figures, based on each channel’s mechanics. Research and compare benchmarks relevant for your chosen platforms. Usually the platforms themselves will be able to provide this data.
2. ROI Benchmarks:
- Industry Standards: Similar to ROAS, ROI benchmarks differ by industry. Some industries might consider a 10% ROI successful, while others aim for higher figures.
- Long-Term Goals: Benchmarks should align with your business’s long-term goals, considering factors like growth rate and market conditions.
- Standard Benchmark: A general benchmark for a healthy ROI is 10% to 20%. This implies that for every $1 invested in a marketing initiative, a return of $0.10 to $0.20 is realized.
- High-Growth Industries: Industries experiencing rapid growth might set higher benchmarks, aiming for a ROI of 30% or more.
- Long-Term Investments: For businesses with long-term investment strategies, a 5% to 10% ROI might be acceptable if it aligns with sustained growth.
Is ROI or ROAS a better metric for your marketing?
Choosing between ROI and ROAS depends on your specific goals and the stage of your business:
1. Use ROAS If:
- Goal is Optimization: You want to maximize returns from specific advertising channels or marketing activities.
- Immediate Impact: Your focus is on short-term gains and quick adjustments to improve campaign performance.
2. Use ROI If:
- Holistic View Needed: You require a comprehensive understanding of overall business profitability and marketing contribution to net profit.
- Building Long-Term Marketing Strategy: Your business decisions are driven by long-term sustainability and growth.
In digital marketing, both ROAS and ROI play pivotal roles. While ROAS guides the optimization of advertising strategies directly, ROI can offer a holistic view that encompasses more aspects of business operations to highlight true cost.
- ROAS: Ideal for channel-specific optimization and quick adjustments in advertising spend.
- ROI: Essential for strategic decision-making, providing insights into the overall health and profitability of the business and it’s marketing investments.
Ultimately, the choice between ROI and ROAS depends on finding the right balance for your business objectives. Integrating both metrics into your measurement toolkit ensures a well-rounded approach to measuring and enhancing the performance of your digital marketing efforts.