Last updated on December 7, 2018 in Growth
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When you’re speaking with an agency or consultant about them running your paid acquisition campaigns, such as Google Ads or Facebook Ads, you may hear them use terms like “ROI” and “ROAS”.
You might know what ROI stands for on the top level, but ROAS may be a new one to you if you’re not steeped in the lingo of the paid acquisition world.
Let’s discuss each separately, and then talk about when you might want to use one over another to determine the success or failure of a project.
ROI, in marketing speak, stands for “return on investment”. Basically, did you make more money than you spent?
“ROI” is one of the most commonly asked about results, usually by executive teams. It’s often phrased something like this:
“Well, what will be the ROI on that?”
This can be an almost impossible question to answer depending on if you’ve actually done the marketing campaign tests or not. Sometimes it can feel like this:
Of course, the goal of any spend is to get a return – whether that’s a new software feature, new customers, and/or new revenue. In marketing, we should always be looking to what our efforts are doing to move the needle on revenue.
I also do not believe that you should try to answer the “What’s the ROI?” question before you’ve run any tests.
You should, however, be prepared with numbers showing the opportunity and how you will get there, including costs like agency or personnel fees.
The formula for ROI is simple:
ROI = (net profit / net spend) * 100
If you spend $10,000 and make $20,000, then this is a 100% ROI because you have made an additional $10,000 from your spend ($20,000 revenue – $10,000 spend = $10,000 profit).
It is important to note that ROI should be taken off the full expenditure. Different from ROAS, ROI includes costs of software, people, design, and everything else going into it.
At the end of the day, true ROI is what tells you if something is successful for your business.
ROAS is a term that, if you’re in the advertising space, you might already be familiar with. If you’re like me and have only been doing any paid acquisition for a short-ish time (a year or so in my case), it’s one that you’ve maybe become familiar with only recently or may not know at all.
ROAS stands for “Return On Advertising Spend”. The formula is simple:
ROAS = revenue made from ads / advertising spend * 100
If you make $10,000 and spend $5,000, then your ROAS is 2x or 200%.
As you can see, ROAS is different from ROI in a few major ways:
As you can see, ROAS is a directionally useful metric that tells you if your advertising campaigns themselves are getting you any results. They show if your ads are being effective in driving impressions, clicks, and ultimately revenue.
What ROAS does not show you is whether your paid advertising department is profitable or effective.
Let’s bring this down to earth, shall we?
This is your scenario:
So what’s your ROI and what’s your ROAS?
See the difference?
Here’s another that might help make it clear.
In this scenario:
In this case, your overall project is not profitable while your ROAS stays the same.
Now that you know the difference between ROI and ROAS, which one should you use when?
ROI is for determining overall profitability. It takes into account ad spend, people spend, and other costs like software.
ROAS is for determining if your ads are working. It is based off revenue, not profit.
So, you should use ROI when you are looking at the overall health of advertising departments. You can always cut/change things to get advertising departments to profitability.
ROAS is for advertising professionals to use to know if their ads are making back (and more!) what they are spending.
What additional questions do you have about ROI vs ROAS? Sound off in the comments.
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