Return on Investment (ROI) and Return on Advertising Spend (ROAS) are essential equations that provide valuable insight for businesses and their marketing strategies. Both equations are Key Performance Indicators (KPI) that are a part of the marketing mix for product pricing and promotion. However, there is much debate about whether ROI or ROAS is a more valuable tool. In this article, we’ll discuss the differences between ROI and ROAS, and give an analysis of when and why to use each tool.
KPI and Metrics
As a business owner, you need to have an intimate knowledge of your pricing metrics in order to make informed advertising and promotion decisions. To do this, you need to sort and analyze spending details and determine the value of the money spent on product development, advertisements and anything other expenditures that you incur as part of the marketing process.
Understanding your returns on money spent gives you an idea of which products and promotions work well - and which ones don’t. There are many ways to gather information about your investments, but ROI and ROAS tend to be the most important and widely applicable equations for online businesses.
Return on Investment (ROI)
Return on Investment (ROI) is an analysis that has been recommended for understanding the actual costs associated with business activities since the beginning of formal instruction in accounting and business practice. ROI is calculated by a simple formula:
(revenue - cost) / cost x 100
Assume that you spend $1000 and make $5000 on the products that you make and sell. Your ROI equation would look like: (5000 - 1000) / 1000 x 100 and your ROI would be 400%. This means that your revenue would land you 400% of your initial investment in the production and sales of your product.
However, ROI is often miscalculated as:
revenue/cost
Additionally, the miscalculated formula still provides a useful metric - the breakeven point - which is a meaningful metric for understanding the impact of a variety of marketing costs.
Benefits of ROI
ROI is useful for understanding the direct value of the costs that go into producing and marketing a product. This is especially important for companies that market physical product in the “real world”. It can also be useful for individuals keeping track of personal and family budgets.
When to USE ROI
ROI should be used to calculate the costs associated with production of physical product. Because much - if not all - of this process occurs in the tactile world, it deals much in absolutes, which fit conveniently into the formula.
ROI is also useful for calculating multiple expenses and total revenue across multiple product lines and revenue streams. As you’ll see, unlike ROAS, ROI gives you the opportunity to interact with multiple marketing factors at a single time.
Return on Advertising Spend (ROAS)
Return on Advertising Spend (ROAS)is a metric that interprets the value of money spent on a single advertisement or ad campaign. It is specifically useful for measuring the efficacy of digital ad campaigns. The calculation for ROAS is:
revenue / total spent
For example, let’s assume that you spend $1000 on a Google Adwords campaign that draws in $5000 in revenues. Thus, your ROAS would be (1000 / 5000), or $5.00. Translated, that means that you would earn $5 on every $1 that you invested into the advertising campaign.
(This calculation assumes that you factor only your advertising costs and none of your fixed operation costs, like salaries, rent and web maintenance.)
ROAS is similar to the incorrect miscalculation of ROI, in that it ignores the percentage of a whole and provides a dollar-for-dollar comparison of the revenue generated by a specific ad campaign.
Benefits of ROAS
ROAS gives you real-time understanding of the true cost of the money that you spend to run online advertising campaigns. While it can technically be used to calculate and single static advertising expense and its impact on your bottom line, it is most often used in connection with online ads, particularly PPC campaigns. ROAS can instruct you as to whether your advertising expenses are worthwhile or whether you should consider a newer, better approach to marketing your product(s).
When to Use ROAS
ROAS is best used in conjunction with online marketing, and with PPC campaigns like GoogleGoogleor MicrosoftAdsin particular. ROAS gives valuable insight into the nuts and bolts of your ad campaigns and gives you the ability to react quickly to shifting customer demands, depending on the success on the campaigns you employ.
Important Considerations
When choosing to understand your business analytics through ROI, ROAS or a combination of both, you must consider the information you need to achieve through running one of these metrics. Here are some factors to think about:
Do you need to see a big picture or a small detail? ROAS is fantastic for gaining information about one piece of your marketing picture, while ROI sheds light on a broader perspective. Neither however, is useful for getting a complete financial understanding of your company’s marketing mix, and should only be used in support of a more robust accounting system.
What other costs do you have? Including fixed costs into your ROI equation is not necessary, though some choose to use this information along with the variables of production and advertising. For ROAS, fixed costs don’t have much of a place to belong, and work better when factored into a larger equation, into which ROAS plays a smaller role.
What are your extra expenses associated with online marketing? Online marketing, like print marketing, has its own drawbacks, in terms of necessary expenses for running ad campaigns on the world wide web. And while they may be lower than the cost of printing thousands of brochures and business cards, they’re still significant. When factoring ROAS, you need to remain mindful of the costs of affiliate commission and cost per click.
Big Differences
ROI and ROAS are not designed to do the same thing. If they performed the same function, there would hardly be any need for both metrics. BothROI and ROAS provide meaningful information, if you take the time to understand and implement them correctly.
ROAS is generally considered a cost of doing business - you have to spend money in order to earn it. Businesses with a healthy bottom line can afford to spend more and earn less, in comparison with leaner budgets that require a healthier dollar-for-dollar return on advertising expenditures. So a company with a ROAS of $3 may be in an equally good position as one that has a ROAS of $7, depending on operating expenses and profit margins.
ROI is more of a pattern tracking metric that establishes the value of investment and can instruct the advertising expenditures of the future. ROI views individual parts as a whole, and can even be a way to integrate scattered ROASs to make them into a cohesive whole for dissection and interpretation.
Changing Business Models
As sales and marketing move from a physical environment to an increasingly online marketplace, it is critical to understand the need for new metrics to monitor company success. ROI has long been a big player in determining product viability and profitability for products and services across the spectrum.
In the increasingly digital age, newer metrics, including ROAS, have risen to steal some of the attention that ROI once wholly commanded. But while these metrics are undoubtedly helpful and valuable, they may lack the cohesiveness that ROI offers.
Regardless, unless online advertising goes the way of the Dodo, ROAS is here to stay. Its value for tracking online ad success is unsurpassed and gives quick feet to marketers who need to understand the marketplace and adjust quickly to the changing tides of consumerism.
Which Metric is More Valuable
So which metric is more valuable for your business and its products? Well, that depends. Both metrics are at leastuseful, andshould not be overlooked. However, one metricin particular standsout for its ability to bundle a variety of expense factors and total revenue into one neat little package: ROI.
Return on Investment gives a straightforward answer to the question of the value of investment against revenues. We can agree that ROAS is valuable, but it only paints a small portion of the whole picture. For companies that operate multiple product lines and advertising campaigns, ROAS must be calculated for every single line and advertisement. This hyper-relevant statistical information is important, but can be overwhelming to continually calculate and re-calculate. Not to mention that ROAS does not stand well on its own, without the support of the information that it represents.
Conclusion
ROI and ROAS are important metrics thatinstrucbusiness owners and decision makers about the returns gained on different types of investments. Both metrics are meaningful, and sometimes their strong points overlap. An increasingly digital world leans toward pushing the importance of ROAS, but ROI is here to stay.
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Setting a local SEO game plan in place involves first understanding your own site through an audit: analyzing its strengths and weaknesses and working to improve each part and removing pages that detract from your brand or leave users at a virtual dead end. An external local SEO auditor can provide this service for you by examining your site and search characteristics and recommending changes that you can implement to improve your searchability.
