If you are involved with digital marketing in any way, you must’ve fallen into the dilemma of ROI vs ROAS. Whether you are a founder building a business or a marketer helping with that goal, these two terms should be your friend — without any confusion about choosing one over another! So, the question remains:
While both ROI (return on investment) and ROAS (return on ad spend) are equally important metrics for marketing campaigns, which one should you prioritize? Which one will bring better results for you?
In this blog post, we’ll take a close look at ROAS vs ROI together to help you decide which one is more important (and relevant) for you. I’ll discuss the key differences between the two metrics, and help clear any confusion you might have about ROAS and ROI!
Let’s dive deep into the battle of ROAS vs ROI!
ROI vs ROAS: What is ROI?
While our initial discussion was about marketing and business, ROI is not a metric exclusive to those!
ROI stands for Return on Investment, which is a tool for evaluating the performance of investments. It measures the profitability of investment while also drawing a parallel between the investment and its returns.
So, in short, ROI is the measure of the actual outcome of an investment or expenditure. When put on pen and paper, ROI is the ratio of profit to investment in percentage.
For example, if you spend $100 on a campaign and generate $300 in revenue, your ROI would be the ratio of these two metrics ($200/$100). So, in percentage, the return on investment will be 200%, as the profit is $300-$100=$200.
How to calculate ROI
ROI is a measure of the profitability of your investment. To calculate ROI, you simply take the return from your investment (the profit generated from your campaign/effort) and divide it by the cost of your investment (the amount you spent on your campaign/effort).
So, the ROI formula for calculating the return on investment would be —
The result is then multiplied by 100 because ROI is usually expressed as a percentage.
ROI vs ROAS: What is ROAS?
ROAS stands for “return on ad spend”, predominantly due to its usage in the advertising world. However, some refer to “return on average spend” when they use the term. Nevertheless, both of them have, more or less, the same meaning.
So, what is ROAS in digital marketing?
ROAS is a metric that deals with the revenue generated from an advertising campaign with respect to each unit of money spent on it. It showcases how successful an ad campaign is by putting the expenditure into perspective.
Notice how I said “revenue” here when it was “profit” for ROI? That’s the thing with ROAS, it doesn’t bother with profits! Rather, gross revenue and its connection with ad expense is the main concern when it comes to this marketing metric.
So, if you spend $100 on a campaign and generate $300 in revenue, your ROAS would be the ratio of these two metrics, which is $300/$100= 3 or, 3:1.
Unlike ROI, ROAS is represented either by a ratio or rational number rather than a percentage.
How to calculate ROAS
ROAS is similar to ROI, but instead of focusing on the profitability of your investment, it measures the efficiency of your ad spend.
To calculate ROAS, you take the return from your investment (again, the revenue generated from your campaign) and divide it by the cost of your ad spend (the amount you spent on ads to promote your campaign).
So, the ROAS formula for calculating the return on ad spend/return on average spend would be —
Do all these sound too similar to ROI? Are you still confused about their differences?
Yes, IT IS a bit tricky to differentiate between these two terms. So, without further ado, let’s clear up this confusion once and for all!
What is the difference between ROI and ROAS?
Here’s a quick rundown of all the factors behind the difference between ROAS and ROI.
👉 ROI is a measure of how much money you’re generating in relation to how much you’re spending. In other words, it tells you how much profit you’re generating for every dollar/unit of money spent.
👉 ROAS, on the other hand, tells you how much revenue you’re generating compared to how much you’re spending. In other words, it tells you how much revenue you’re generating for every dollar/unit of money spent.
So, it’s evident that while ROI will tell you the profitability, ROAS won’t!
Additionally, ROAS only deals with direct expenditures like the amount spent on ads. The “investment” part of ROI includes other costs involving human resources, tools, etc.
Last but not least, ROAS is usually utilized for micro-level measurement for specific advertisement campaigns. ROI works on a more grandiose scale — giving you a picture of the effectiveness of the overall marketing activities or business operations.
For a quick overview on what is the difference between ROI and ROAS, see the image below:
Some people prefer to focus on ROI as it’s a more direct reflection of the profitability of their efforts. Others prefer to focus on ROAS because it’s a more direct measure of growth. Ultimately, it’s up to you to decide which metric is more important for your business.
More on that in the next section 👇
ROAS vs ROI: which metric should you focus on?
The answer is: both!
The ROI vs ROAS debate has been around for a while. Which one is the better metric to focus on? The answer, as with most things in life, is it depends. It depends on your business goals and what you are trying to achieve.
ROI tells you the amount of generated profit against cost. It basically shows you how efficient your business is. Are you making the most of your resources? Are you spending too much on advertising? ROI will answer these for you!
If you are focused on profitability, then ROI is the better metric to focus on. The higher your ROI, the more profitable your business is.
In contrast, ROAS gives you the total revenue against the specific cost of generating it. This is important to see if your advertising spending is effective or not. Are you getting a good return on your investment? Is your advertisement living up to the expectation? ROAS will help you solve these mysteries!
If you are focused on growing your business, then ROAS is the better metric to focus on. The higher your ROAS, the more efficient your ad spend is, and the faster your business will grow!
My advice? Utilize both of them.
You can use ROAS for campaign-level performance assessment, while ROI is for a more macroscopic view and assessing multiple campaigns.
Also, you may alternate between them depending on your niche, business size, business goal, etc. For example, early-stage startups aiming for traction, product-market fit, and market penetration can benefit from focusing on ROAS. However, if profitability and growth are prioritized, then your business/marketing plan should definitely rely on ROI.
For example, influencer marketing campaigns.
👉 Here’s how to measure influencer marketing ROI to make sure your influencer marketing efforts are on the right track!
ROI vs ROAS Example
So, which one will suit you the best — ROAS or ROI? 🤔
Let’s see an example of how we can make use of both ROI and ROAS to draw a clearer picture.
Say, your company makes $50,000 in revenue and spends $15,000 on advertising. The additional costs of production, employees’ salaries, and office operation adds up to about $40,000.
So, the total investment/expenditure comes down to ($15000 + $40000) = $55,000. Hence, the amount of loss is $5,000.
The ROAS and ROI in this scenario will be —
ROAS = ($50000 / $15000) = 3.33:1 = 333.33%
ROI = (-$5000 / $55000) x 100 = -9.09%
The ROAS calculation may look good at first glance, but the ROI tells you a different story. These figures tell you that your business is not making money it is running at a loss. This is why it is so important to keep up with both your ROI and your ROAS at the same time.
On the other hand, these calculations also tell you that your advertising campaigns are doing well — judging by the ROAS. But the other costs are hindering you from making a profit. So either those costs will have to be cut down, or the ROAS will have to be optimized even further.
This way, you can use ROI and ROAS to keep your finger on the pulse of your business, and as a result, see it succeed!
But do you know if you’ve achieved product-market fit or not?
Read this complete guide on 👉 how to measure Product Market Fit!
Frequently asked questions on ROAS vs ROI
Q. Is higher ROI better?
Ans: Yes. Higher ROI (return on investment) means more profit generated from your investment, which signifies your marketing efforts and overall business are succeeding.
Q. Is higher ROAS better?
Ans: Just like ROI, higher ROAS (return on ad spend) signifies better results. The greater the value, the more revenue you generate from the campaigns under discussion.
Q. What is a good ROI?
Ans: It depends. ROI varies across different niches/industries, business sizes, audiences, locations, and countless other factors.
Also, large corporations with Returns on Investments as low as 10% can be more successful than an SME with a 25%-30% ROI. There are lots of other factors to consider here before jumping to a conclusion.
Q. Is ROAS the same as profit?
Ans: No, they are quite different from each other. ROAS is the ratio of revenue and cost — putting each other into perspective for measuring the success of campaigns and business operations.
Profit, on the other hand, simply tells you the difference between the revenue and the cost. It’s not a ratio of any sort, it’s always a rational number with monetary value.
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That’s a wrap for today. Did I miss anything?
Comment below if you have any questions or suggestions for me regarding this topic of ROI and ROAS. I’m all ears!