Confused about ROAS vs ROI? You're not alone. Click on this blog to finally nail the distinction and understand the numbers behind your marketing campaigns.
Have you ever felt a twinge of confusion when dealing with ROAS and ROI? 🙈 No need to be embarrassed. These two terms, seemingly cut from the same cloth, can leave even the most experienced marketers second-guessing.
This blog is here to break it down and put an end to the confusion once and for all.
What is the meaning of ROI in marketing?
ROI, which stands for Return on Investment, is a vital measure that helps assess the effectiveness and returns from your marketing. In simpler terms, it tells you whether the money you put into marketing is resulting in enough revenue and profit.
The formula for calculating ROI in marketing is pretty simple:
- Net Profit is your gain from the investment minus the cost of the investment.
- Cost of Investment refers to the total money you spend on the marketing campaign.
The idea with ROI is to earn more than what you put into a marketing campaign – essentially making more dollars than you spend.
A solid starting point for good ROI is around 5, meaning for every dollar you spend, you're making five dollars. The best marketing efforts might even get you up to an ROI of 10. However, if your ROI falls below 2, it means you haven't earned enough to justify continuing with that particular marketing strategy.
But remember that every business is different, and every industry has its own benchmarks, so don't take the ballpark figures as gospel.
💡 It's important to note that ROI can be represented both as percentages (as shown in the image formulas) and as absolute values (as used in the text).
What is the meaning of ROAS in marketing?
ROAS, meaning Return on Ad Spend, is a marketing term that tells you the amount you earn on every dollar you spend on advertising.
This metric is vital for evaluating the effectiveness of your digital advertising campaigns, providing insights into the performance of your advertising initiatives, and guiding you in refining future strategies for better outcomes.
Calculating the return on ad spend formula is also pretty easy:
If your ROAS is greater than 1, it means you're at least making enough revenue to cover your advertising costs. However, if it's below 1, you might be losing money after considering expenses.
A good rule of thumb is a ROAS between 3-5, meaning for every dollar spent on advertising, you're making three-five dollars in revenue – that's considered pretty good by many businesses.
But what is a good ROAS? What's considered a good ROAS can vary a lot based on the industry, type, and size of the business. It’s best to compare yourself against your industry averages.
💡 It's important to note that ROAS can be represented both as percentages (as shown in the image formulas) and as absolute values (as used in the text).
ROAS vs. ROI - differences and similarities
Let’s start with the differences:
- Scope: ROAS is specific to your advertising efforts. It only considers the money you spend on ads. On the other hand, ROI is broader and takes into account all the costs of doing business, like salaries, rent, and production costs.
- Time frame: ROAS is like a quick check-up after a specific ad campaign. It tells you right away how well your money was spent on ads and if you made a profit immediately. On the flip side, ROI is more like a marathon runner – it looks at the big picture over a longer period.
- Purpose: Both ROI and ROAS are used to measure the effectiveness of your spending. They help you understand how well your investments, whether in advertising or overall business, are paying off.
- Profitability insight: Both the ROI and ROAS metrics give you an idea of profitability. A higher ROAS or ROI means you’re getting more return for your investment, which is good for business.
- Use case: Both ROAS and ROI can be used to make strategic decisions. For example, if you find that your ROAS in marketing is high but your overall ROI is low, it might indicate that your advertising is effective, but other costs are dragging down your profits. This could lead you to look for ways to reduce those other costs.
Examples of ROAS vs. ROI
Whether things are going great, not so well, or when it's all about making a profit, these examples show how ROI vs ROAS work together to figure out if your marketing strategy is working.
➕ Positive ROAS and positive ROI ➕
Let’s say clothing brand, Brand W, decided to expand its pet accessories product offering and spent $10,000 on marketing it online. The marketing campaign worked like a charm, and they raked in $50,000 from this new line of pet accessories.
Now, let's do some math:
- ROAS: They got $5 in sales for every $1 spent on the campaign. That's a whopping 500% return if we turn it into a percentage.
- ROI: After covering all the bills, like making the clothes and shipping them, they ended up with $20,000 in profit. That's double the $10,000 they spent on the campaign. So, the ROI is a cool 200%, showing they made twice as much as they invested.
This example illustrates how ROAS and ROI, while often confused, can provide different insights into the performance of a campaign, highlighting the importance of tracking the right e-commerce KPIs.
❌ Negative ROAS and negative ROI ❌
Picture a tech startup, Tech X, super excited about their new app. They threw $20,000 into a marketing campaign to get the word out. Sadly, things didn't go as planned – they only pulled in $10,000 in revenue.
Now, let's break down the numbers:
- ROAS: For every dollar they spent on the campaign, they only got 50 cents back. That's a 50% return if we turn it into a percentage.
- ROI: After covering all the app-making and server costs, they found themselves with a net loss of $15,000. This means they lost 75% of the money they put into the campaign.
As you can see, this campaign wasn't a win. Both ROAS and ROI are in the negative, showing that it didn't pan out well. This is why it's crucial to track these important metrics – they tell you if your marketing strategies are hitting your KPIs.
➕ Positive ROAS but negative ROI ❌
Imagine a company called Eco Y, all about selling eco-friendly stuff. They put $30,000 into a marketing campaign to shout about their new eco-friendly kitchenware. The campaign hit the jackpot in terms of sales, pulling in a sweet $60,000.
Now, let's do some math:
- ROAS: They got $2 in sales for every dollar spent on the campaign. That's a 200% return if we turn it into a percentage. Seems like a great success, right?
- ROI: After covering all the expenses like making the eco-friendly goodies and getting them to customers, they found themselves with a net loss of $10,000. That means they lost about 33.33% of the money they put into the campaign.
So, while the ROAS says the campaign brought in sales, the ROI tells a different story – they ended up with a loss when the total costs were considered. This shows the significance of having a comprehensive digital marketing dashboard to grasp the full picture of your campaign's performance.
❌ Negative ROAS but positive ROI ➕
Let's look at Health Z, a company selling health supplements. They threw $40,000 into a marketing campaign to hype up their new line of vitamin supplements. The campaign pulled in $30,000 in sales.
Now, let's break it down:
- ROAS: For every dollar they spent on the campaign, they got back 75 cents. That's a 75% return if we turn it into a percentage. Looks like the campaign didn't cover its own cost.
But, here's the twist…
- ROI: After considering everything from making the vitamins to shipping them out, they found themselves with a net profit of $10,000. So, the ROI is 25%, meaning they made a profit that's 25% of what they spent on the campaign. This shows that even if the ROAS is in the red, indicating the campaign didn't cover its cost with sales, the ROI is in the green, saying they made an overall profit. It's a reminder that even if the sales don't break even, you can still come out on top in the end.
As you can see, both metrics are very useful. They provide different insights and are used for different purposes.
When to use ROAS vs. ROI
- Use ROAS when you want to measure the effectiveness of a specific advertising campaign. It’s particularly useful when you’re trying to understand which campaigns are driving the most revenue relative to their cost. For example, if you’re running multiple ad campaigns on different platforms (like Google Ads, Facebook Ads, etc.), you can use ROAS to compare their effectiveness and decide where to allocate more of your ad budget.
- Use ROI when you want to understand the profitability of your overall marketing efforts. ROI takes into account all costs associated with a campaign, not just the direct cost of the ads. This includes indirect costs like labor, overhead, and technology costs. If you’re trying to determine whether your overall marketing strategy is profitable, or if you’re comparing the profitability of marketing to other business investments, ROI would be the more appropriate metric.
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So, why settle for crunching numbers when you can effortlessly monitor your analytics with One-Click Report?
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Digital copywriter with a passion for sculpting words that resonate in a digital age.