Marketing and advertising have evolved substantially over the last couple of decades. In a pre-digital world, we relied heavily on trade shows, telemarketing, and traditional media advertising such as television, print, and radio. Today, in our ever-changing and diverse marketing landscape, myriad advanced technologies give digital marketers the power to access and influence potential customers across multiple channels and devices.
Marketing analytics have also evolved. Return on investment (ROI) was considered the gold standard metric to justify marketing spending and to measure marketing campaign success. With the advent of e-commerce and digital marketing platforms and tools, return on ad spend (ROAS) was created to measure the amount of gross revenue a business earns for each dollar spent on digital advertising.
So, what exactly are ROI and ROAS, and which is the better measure of success for your business? Below we outline what ROI and ROAS are at a high level, and how each measures marketing and advertising campaigns.
What is ROI?
In basic terms, marketing ROI (MROI) measures the return on investment from the amount a company spends on marketing and advertising. There are a few different ways to calculate marketing ROI, but the core formula is straightforward:
Marketing ROI = (Attributable Sales Growth – Marketing Cost) / Marketing Cost
Based on the number of possible touch points and influencers that lead to sales and revenue, companies use different methodologies to determine marketing costs that go into their ROI calculation.
- Single Attribution (First Touch / Last Touch) – First touch attribution is when credit for the revenue is assigned to the first marketing touch point, such as a lead generated from a table or booth at an event, or a new client intake form generated from an online ad. Last touch attribution gives the conversion credit entirely to the final touch point, such as a marketing employee who acts on the client intake form and converts it into a sale.
- Single Attribution with Revenue Cycle Projections – It can take time to attribute marketing efforts to sales and revenue, especially if your business has a longer sales cycle. This attribution method enables you to calculate single attribution over some time.
- Multi-Touch Attribution – If a variety of marketing channels and influencers nurture customers toward a sale, multi-touch attribution, which shares success (or failure) among various marketing activities, makes more sense than first or final touch point attribution.
- Test and Control Groups – Comparing test and control group outcomes can help determine the effectiveness and impact of a new marketing campaign. This, of course, takes time, company resources, a sales volume big enough to make any findings statistically significant, and the know-how to create and execute the testing and analyze the data.
- Full Market Mix Modeling – This data-driven analytic approach looks at the historical relationship between marketing spending and sales data using regression analysis. As with the use of test and control groups, this complex method requires resources and knowledge.
What is ROAS?
Return on ad spend (ROAS) measures the amount of gross revenue your business earns for each dollar spent on digital advertising, such as Google Ads. A simple formula used to calculate ROAS is:
ROAS = Gross Revenue / Advertising Expenses
For an e-commerce company that obtains new business primarily from digital advertising, measuring ROAS is a must. If your business uses various marketing channels that include digital advertising as well as others, you still need to understand the ROAS because it will help you determine how to achieve the highest return on your online marketing ad dollars spent.
Here’s an example of ROAS. Let’s say you pay $300 to Google Ads and generate $3,000 in revenue. Your ROAS ratio is 10:1, meaning for each dollar you spend on ads, you earn $10. The higher the revenue to ad spends ratio, the better.
What is the difference between ROI and ROAS?
It’s natural to wonder about the difference between ROI and ROAS, and even how they contribute to brand performance indicators. Essentially, think of it this way: ROI measures the profit generated by marketing programs relative to their cost. It measures how marketing and advertising contribute to a company’s bottom line and determines if a marketing campaign was worth the investment.
ROAS, on the other hand, measures the gross revenue generated for every dollar spent on online advertising. It won’t tell you if an ad spend is profitable for your company. And you may get a minuscule ROAS, but it will not be a negative number, unlike ROI. ROAS won’t necessarily tell you if an associated sale would have occurred anyway. Have you ever searched for a company to find their website to make a purchase and then clicked on their ad because it was the first thing you saw? Enough said.
What is a good ROI or ROAS?
A “good” ROI for your company will largely depend on your cost structure and profitability margin, and how you attribute marketing costs which were touched on earlier. Since a 5:1 ROI ratio is in the middle of the ROI bell curve, anything over 5:1 is usually considered good for most businesses.
There is no “right” answer for ROAS, but in general, an acceptable ROAS is a 4:1 ratio, meaning $4 in revenue to $1 in ad spend. According to a 2015 Nielsen study, the average ROAS across most industries is around $2.87 for every $1 spent. Some industries have higher ratios and others lower. Determine your industry’s average before establishing your ROAS goal.
When calculating ROAS, be aware of the other direct costs or expenses associated with your digital ad campaign so your final calculations reflect an accurate ad spend. These costs can include vendor and partner fees and commissions, affiliate commissions, network transaction fees, the average cost per click (CPC), and the number of impressions purchased. Including these ad, costs won’t reflect overall profitability like ROI, but they will give you a more accurate ROAS ratio.
Is it better to measure ROI or to measure ROAS?
Several factors will go into your decision-making process concerning ROI vs ROAS, such as your mix of digital advertising and traditional marketing programs, the importance of short-term revenue growth over long-term profits, and more. Remember that ROAS looks at campaign-specific revenues rather than profit. Unlike ROI, it won’t tell you whether your paid advertising effort is profitable for the company, but it can be a great way to help you improve your online marketing efforts and generate clicks and revenue. For this reason and others, many companies look at both ROI and ROAS to create results-oriented marketing strategies and campaigns.
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