Insights What is the difference between ROI and ROAS?
In my field of work, I naturally have clients asking me about the ‘effectiveness’ or ‘success’ of a campaign based on its ROI (return on investment). And whilst this isn’t necessarily the wrong term to use, quite often the answer actually lies within the ROAS (return on ad spend) score instead. It’s a very common and understandable misconception, so in this article I hope to explain the difference between them in a digital marketing context.
In a marketing context, ROI and ROAS are frequently used interchangeably, but there is a big distinction between the two and separate use cases for each.
Buckle up, this is a little wordy, but I promise by the end it will make complete sense!
The quick definition
ROI is a measure of how much profit you earned in relation to how much you spent.
ROAS, on the other hand, is a measure of how much revenue you earned in relation to how much you spent or how efficient your campaigns are running.
And now for the longer definition...
ROI is for business
You can use various methods to calculate ROI, but the most common is to divide your profits by your ad spend. In other words, if your ad campaign generated £10,000 in profits, and you spent £2,000 on advertising, your ROI would be 20%.
ROI is not always a ratio which can be used on a play-by-play basis as there are many to consider here, which often take place over longer periods of time.
ROAS is for marketing
To calculate ROAS, divide your total revenue by your total ad spend. The ROAS calculation does not include any costs associated with running the campaign other than the ad spend. e.g. salaries, agency fees, etc are not included.
It is only a ratio of ad spend to revenue. For example, if you spent £100 on advertising and generated £1,000 in revenue (NOT profit), your ROAS would be 10.
You can use ROAS to inform your ad spend in a way that ROI cannot. If you know what your ROAS target needs to be in order to meet your profit goals, you can adjust your ad spend accordingly.
ROAS is also a great indicator for when to increase or decrease your ad spend in relation to demand. If your actual ROAS is much higher than the target ratio, there is a lot of opportunity being left on the table.
A higher ROAS means cheaper acquisition costs. This is a good time to increase spend and leverage this ratio. Because ROAS drops when spend increases, it is a good way to run an account that is as efficient and profitable within the supply and demand landscape by maximising sales at a desired acquisition cost.
It also makes day-to-day account management a breeze.
Here’s an example to hopefully simplify things:
Let's say I am running three campaigns (A, B and C) within my account all for the same client and I need to maintain a combined ROAS of 5:1, but my account is sitting at a combined 3:1 ROAS with campaigns A, B and C having ratios 3:1, 6:1 and 2:1 respectively. I can, at a glance, make some calls as to how to bring this account back in line with the 5:1 target.
I could increase campaign B's spend while heavily reducing campaign A and C's spend. This would lift the overall ROAS ratio to where we need it to be.
Alternatively, I could pause campaign A and C completely. This would immediately push our ROAS to the 6:1 ratio. As this is now above where we need to be, we can then increase spending here to bring the ratio back to 5:1.
Thirdly, and by no means lastly, I could and would decide to spend some time looking into WHY campaign A and C are underperforming and, through optimising, lift these ratios. This would be the best way to ensure that we are still maintaining coverage of all campaigns. We don’t only want to be pushing a single product or service, for example, even though it is a good seller. This would cause issues with any inventory and stock levels etc.
To ROAS or not to ROAS
So in a nutshell, ROI looks at calculating your profits-to-spend ratio. This is useful to understand performance over a longer period of time considering many factors. This is the most accurate ratio to look at when evaluating marketing success at a business level. This is most often done by looking back in time.
ROAS is a short-hand method to get accurate enough estimates that can inform marketing tactics in real time and can be used to guide campaigns going forward.
Now you understand these distinctions, it should also help you when determining your targets BEFORE a campaign has commenced, giving you a better chance of optimising results with your digital team or agency.
If you would like to find out more about how we can help you connect strategically, creatively or digitally, then call us or get in touch. We’d love to hear from you.