If you’re involved in digital marketing or run online advertising campaigns for your business, you’re likely to have come across the following terms at some point: ROI and ROAS. While ROI used to be one of the most important metrics for evaluating success on digital channels, businesses are increasingly coming to rely on ROAS to guide their digital strategy. But what do ROI and ROAS mean? And perhaps more importantly, what’s the difference between ROI and ROAS for digital advertising? Find out everything you need to know about these campaign performance metrics with our helpful guide.
ROI stands for “Return on Investment.” Essentially, it’s a measurement of the return on a particular investment, relative to the cost of the investment. In other words, it’s a ratio between your net profit and investment. There’s a simple formula that you can use to work out the ROI:
ROI = (Net Profit / Net Spend) x 100
ROAS stands for “Return on Ad Spend.” ROAS can help you determine the efficiency of your online advertising campaigns by calculating the amount of money your business earns for each pound it spends on advertising. You can use the following formula to calculate ROAS:
ROAS = (Revenue Generated from Ads / Advertising Spend) x 100
The difference between ROI and ROAS
When it comes to ROI vs. ROAS, there are a couple of major differences. Firstly, ROAS looks at revenue, rather than profit. Secondly, ROAS only considers direct spend, rather than other costs associated with your online campaign. In a nutshell, ROAS is the best metric to look at for determining whether your ads are effective at generating clicks, impressions, and revenue. However, unlike ROI, it won’t tell you whether your paid advertising effort is actually profitable for the company.
Let’s take a look at an example of ROAS vs. ROI to see how this works in practice. Imagine Company A makes $100,000 in revenue and spends $25,000 on ads. In addition, the cost of software, personnel, and so on comes out to around $80,000. In this scenario, you can use the ROI and ROAS formula to work out exactly how effective Company A’s campaign is:
ROI = (-$5,000 / $105,000) x 100 = -4.76%
ROAS = ($100,000 / $25,000) x 100 = 400%
So, while ROAS provides an extremely positive figure, indicating that the ads are effective, ROI reveals that the overall project isn’t making the business any money. In fact, Company A is making a loss. That’s why it’s so important to stay abreast of ROI and ROAS when you’re running digital ad campaigns. Otherwise, you could end up investing a considerable amount of money in a campaign that’s generating an overall loss for your business. By contrast, you may discover that a highly cost-effective campaign simply isn’t generating anything meaningful when it comes to clicks and impressions.
Should I use ROI or ROAS?
When you consider ROI vs. ROAS, it’s important to remember that it isn’t an either/or situation. Whereas ROI can help you understand long-term profitability, ROAS may be more suited to optimising short-term strategy. To craft an effective digital marketing campaign, you’ll need to utilise both the ROI and ROAS formulas. ROI provides you with insight into the overall profitability of your advertising campaign, while ROAS can be used to identify specific strategies that can help you improve your online marketing efforts and generate clicks and revenue.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.