Traditionally, marketers have used different digital advertising strategies and metrics to calculate and monitor the implementation and performance of their marketing campaigns. The primary metrics used by advertisers and businesses to assess the effectiveness of their business are ROI and ROAS. While these two approaches have often been used interchangeably, there are distinct differences that digital marketers must be aware of.
ROI is used to optimize a strategy, whereas ROAS optimizes a tactic
Partners and clients have often questioned their digital advertising campaign effectiveness and decided on the right advertising metric to use. Below we outline the basics for learning ROI and ROAS so you can produce an informed decision that aligns with your business objectives.
Return on Advertising Spend (ROAS)
Return on ad spend is an ad-centric metric for advertising campaigns that measure the gross revenue generated by each dollar spent on digital advertising, whether from a single advertisement or an advertising campaign. In other words, the metric allows marketers to quantify a given ad’s effectiveness and can be used to evaluate which methods are working or need improvement.
The ROAS figure can be expressed in a variety of different ways:
- A ratio
- A percentage
- A comparative dollar
- A multiple of the invested amount
ROAS is calculated by dividing the revenue generated from the ad campaign by the cost of advertising:
ROAS = (Revenue generated by ad / Money invested in the ad)
Return on Investment (ROI)
Return on investment is a more traditional advertising metric that measures the total profit generated by ads relative to the cost of those ads. Therefore, ROI calculates the overall profitability of an advertising campaign and can be used to assess whether an ad campaign is worth investing in or not. ROI is a business-centric metric that effectively measures how ads perform as part of a business’s overall strategy and an organization’s bottom line.
ROI is calculated by separating the profit made on an asset by the cost of that investment. It can also be calculated by identifying the net return on investment, dividing this by the cost of investment, and multiplying it by 100.
ROI = (Profit – Costs x 100 / Costs)
Which Digital Advertising Metric is ‘Better’?
When considering the advertising metric that is better for you, it is essential to consider the benefits of each approach and the potential pitfalls to avoid to maximize the desired benefits for your business.
ROAS considers the costs associated with marketing activities as a fundamental and necessary business practice to succeed, whereas ROI interprets digital marketing activities as a potential investment opportunity to grow profits incrementally and expand business operations.
Therefore, ROI takes on a macro-level approach, where the impact of specific advertisements is measured against a business’s overall strategy to see how well they are performing. ROI incorporates the ‘bigger picture’ when assessing the benefits of each advertising campaign. Conversely, ROAS takes on a micro-metric or advertiser-centric approach that can gauge the impact and effectiveness of the online advertising campaign.
ROI and ROAS
Although calculating the return on investment is vital for assessing the development of a marketing campaign, it does not help advertisers decide whether a digital advertising campaign will be successful. ROAS extends past calculating expected returns by enabling marketers to identify specific marketing tactics expected to drive sales. These methods can be applied to improve and develop a digital advertising campaign to ensure the best possible results.
ROAS, however, does not consider the overall profitability of an advertising campaign, which could prove to be a greater risk when deciding whether to invest in a campaign or not. Similarly, ROAS overlooks the value of using a multi-channel approach as it does not measure the impact of one ad channel against another.
It remains evident that while ROAS and ROI differ in their approach, these digital advertising metrics benefit businesses in measuring the return on advertising campaigns. However, return on ad spend (ROAS) is the preferred strategy among marketers in assessing their digital advertising campaigns and channels because it can accurately depict the impact of a digital ad campaign. It also provides marketers with real-time campaign analytics, allowing advertisers to adapt and improve their campaign tactics accordingly.
To conclude, advertisers should be cautious of hyper-focusing on one specific metric to measure campaign effectiveness, as this may lead to overlooking other meaningful metrics or missing necessary costs for your campaign. Therefore, marketers should simultaneously employ ROI and ROAS approaches to develop a comprehensive digital advertising campaign, maximize the benefits, and promote greater returns.