Hear about new posts as they happen. Improve your marketing.

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.

What is “ROI”?

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.

ROI formula

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 theĀ fullĀ 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.

What is “ROAS”?

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:

  1. ROAS uses revenue, not profit;
  2. ROAS only takes into account the direct spend, not other costs associated;

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.

An example of the difference between ROI and ROAS

Let’s bring this down to earth, shall we?

This is your scenario:

  • You make $10,000 in revenue
  • You spend $5,000 in ads
  • Your personnel, production, and software costs are $3,000

So what’s your ROI and what’s your ROAS?

  • ROI is $2,000 / $8,000 * 100 = 25% (positive)
  • ROAS is $10,000 / $5,000 * 100 = 200% (also positive)

See the difference?

Here’s another that might help make it clear.

  • You make $10,000 in revenue
  • You spend $5,000 in ads
  • Your personnel, production, and software costs are $7,000

In this scenario:

  • ROI is -$2000 / 12000 * 100 = -16% (negative)
  • ROAS is still $10000 / $5000 = 200%

In this case, your overall project is not profitable while your ROAS stays the same.

ROI vs ROAS – which to use?

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.

Looking for tool and book recommendations?

Sometimes the hardest part of growing your company is finding the right tools to use to execute on your strategies. Tools are a dime a dozen, but the right tool for the job is hard to find.

Check out our recommendations for lead generation and SEO tools as well as the books we recommend reading as you grow your business.

More Articles

Announcing the 2019 digital marketing industry pricing survey

Posted by on January 16, 2019 in Announcements

In 2017 we published our digital marketing pricing survey, which became one of the most referenced pricing surveys in the digital marketing industry. 184 respondents…

View Post
How to hire a marketing agency when you’ve had a bad experience

Posted by on January 14, 2019 in CredoCast/Hiring a marketing provider

“I know they’re the expert, but I want them to just work on building me backlinks and not touching my site until they prove that…

View Post
The best ecommerce podcasts for you to listen to in 2019

Posted by on January 10, 2019 in Business

Podcasting has grown significantly in the last five years: As has interest in areas like dropshipping (which is one small part of ecommerce overall): According…

View Post