ROAS vs. ROI Digital Metrics Explained

Return on ad spend or ROAS is a marketing metric that measures how well a digital campaign performed. ROAS helps marketers compare their campaign cost or evaluate improvments needed for better campaign performance. Many marketers think that Return On Investment ROI and ROAS are the same definition. There are differences and it is absolutely necessary in online marketing to know the difference between the ROI and ROAS. As one of your primary task in managing marketing you will need to be able to measure advertising cost and evaluate how well it fits in with your marketing strategy. Now let’s jump in and take a closer look.


The difference between ROI and ROAS

The confusion starts with Ad Spend performance figures. When we define AdSpend that means, the total amount spent on advertising a product. Agencies typically use AdSpend data to calculate their clients ROAS. The difference is with ROAS, we are looking at the measurement of a campaign or ad spend. If your company produces more than one product or service then this naturally does not include your entire marketing expenditure. One of the reasons for using ROAS reporting is that, third party creative agencies sometimes lack the transparency of seeing the total cost of marketing their client spends in order to meet its marketing goals. Companies tend to withhold private data making actual profit difficult to calculate. So in order to report the performance on an advertising campaign that is tied to a budget, ROAS is used to report campaign performance or tactical information.

When we talk about Return On Investment, it is the general business accounting formula used to determine the overall profit coming from marketing. It tells us the revenue generated for every dollar or euro invested in our marketing plan. This a more accurate calculation that measures the overall revenue from the marketing strategy within an organization. The keyword here is strategy because how profitable a company’s marketing efforts are to the bottom line, is all due to a strategic plan.

How to calculate ROI

ROI is calculated: ROI = profits-costs x 100 / costs. So what we are looking at are investment cost and how this effects a company’s bottom line.

How to Calculate ROAS

ROA formula: ROAS = revenue from ad campaign / cost of ad campaign. We are reporting the overall revenue of a particular ad campaign. ROAS reveals a campaigns tactical data.

The thing to really think about here is, how we buy advertising vs. how customers find our offer and convert. Consumers visit multiple websites and locations online through multiple devices before making a purchasing decision. Brands with multiple touchpoints are more likely to be selected by consumers according to research done at McKinsey Global Management Consulting.  Yet we are using the ROAS model that measures a narrow campaign channel. For example let’s say you ran a Facebook ad campaign. A visitor saw and clicked on your ad on his mobile phone. Later that evening he is at his PC at home and does a direct search on your brand name and visits the website. The following week he sees your product on Amazon from his work Laptop and makes a purchase. Though having multiple digital touch points got you the sale, the attribution is not evaluated correctly. Since the path taken to make a purchase is so diverse, isn’t it better to focus on ROI as a measurement for how well your overall marketing plan is working? In order to achieve this, we need to have attribution data. Data that shows the path taken by our customers. Focus on the broader touchpoints and its relationship to the overall strategy. As long as there is a positive return on advertising investment we are moving in line with a strategic plan vs. looking at tactical advertising cost per campaign.