In today’s digital age, businesses rely heavily on online advertising to attract customers and drive sales. Two metrics that are commonly used to measure the success of digital advertising campaigns are ROAS (return on advertising spend) and ROI (return on investment). While both metrics are essential to understanding the effectiveness of advertising campaigns, they are often confused with each other. Understanding the difference between these two metrics is crucial for B2B marketers to make informed decisions about their advertising investments. The importance of understanding digital ad spend, and the value that your company derives from such investments, can be illustrated by the following stats:
- According to a study by eMarketer, the US digital ad market will surpass $300 billion by 2025, making up more than three-quarters of all media spending.
- Moreover, eMarketer forecast that digital ad spending will continue to grow over the next few years, reaching $526.6 billion by 2024.
- Surprisingly, a survey found that 61% of marketing leaders do not use ROI when making strategy decisions because they aren’t confident in their own data. (Business Wire)
This growing ad spend combined with a lack of visibility into the right metrics, and an inability to calculate ROI are hindering marketers from proving how much they increase business growth.
In this blog, we delve deeper into the differences between ROAS and ROI and why it’s important to know both these metrics. We explore different scenarios where one metric may be more relevant than the other and provide examples to help businesses make informed decisions about their advertising investments.
It is important to understand the difference between ROAS and ROI, as they provide different perspectives on the effectiveness of marketing campaigns. Quite simply, ROAS measures the revenue generated by advertising campaigns relative to the amount spent on advertising, whereas ROI measures the overall profitability of an investment, including all associated costs and returns. Now let’s take a closer look at these metrics.
ROAS is a metric that measures the revenue generated by an advertising campaign relative to the amount spent on the campaign. It is calculated by dividing the revenue generated by the campaign by the cost of the campaign. ROAS is important in determining the effectiveness of advertising investments because it provides insight into the direct impact of advertising on revenue generation.
By measuring how much revenue was generated for every dollar spent on advertising, businesses can determine which campaigns are performing well and which ones need improvement.
For example, if a business spends $10,000 on a digital advertising campaign and generates $50,000 in revenue from that campaign, the ROAS would be 5:1. This means that for every dollar spent on advertising, the business generated $5 in revenue. A high ROAS like this indicates that the advertising campaign was successful in attracting customers and driving sales.
This insight can also be used to optimize advertising campaigns by identifying which channels or campaigns are generating the most revenue. By focusing their advertising efforts on the channels with the highest ROAS, businesses can maximize their return on investment and improve the overall effectiveness of their advertising campaigns. Moreover, by monitoring ROAS over time, businesses can identify trends and adjust. ROAS makes it easy to track and measure the effectiveness of campaigns. By leveraging data and analytics tools, businesses can calculate ROAS in real-time and adjust their campaigns on the fly.
In summary, ROAS is an important metric for businesses to measure the effectiveness of their advertising investments. By using ROAS to evaluate campaigns, businesses can make informed decisions about their advertising strategies and optimize their return on investment.
ROI is a financial metric used to evaluate the profitability of an investment. It measures the ratio of the net profit or gain from an investment to the investment’s cost. In advertising, ROI helps businesses determine the financial impact of their marketing/advertising investments and make data-driven decisions.
Let’s take an example of a hypothetical company that invests $10,000 in a digital advertising campaign, for example, for design costs and other related costs incurred by hiring outsourced vendors. The campaign generates $50,000 in revenue, resulting in a net profit of $40,000. To calculate the ROI of the advertising campaign, we can use the following formula:
ROI = (net profit / cost of investment) x 100
Using the numbers from our example, the ROI of the advertising campaign would be:
ROI = ($40,000 / $10,000) x 100 = 400%
This means that for every dollar invested in the campaign, the company earned $4 in net profit.
ROI is important in determining the effectiveness of advertising investments because it provides a comprehensive view of the financial impact of advertising on a business. It considers both the revenue generated and the cost of the campaign, allowing businesses to determine the actual profitability of their advertising investments. By comparing the ROI of different campaigns, businesses can determine which campaigns are generating the highest profits and allocate their advertising budget accordingly.
In summary, ROI is an important metric for businesses to evaluate the profitability of their advertising investments. By considering both the revenue generated and the cost of the campaign, businesses can determine the actual financial impact of advertising on their bottom line.
Differences between ROAS and ROI
The key difference between ROAS and ROI is the level of granularity in their analysis. ROAS only looks at the revenue generated by a specific advertising campaign and the cost of that campaign, while ROI takes into account all costs and returns associated with the investment, regardless of whether they are directly related to the campaign or not.
The choice between ROAS and ROI depends on the specific goals and circumstances of the business. For example, ROAS is often more relevant in situations where the goal is to maximize revenue generated from a specific advertising campaign. This may be the case for businesses that want to test the effectiveness of a new advertising channel or campaign and want to quickly determine if it is generating a positive return.
On the other hand, ROI is more relevant in situations where the goal is to evaluate the overall profitability of an advertising investment, including all associated costs and returns. This may be the case for businesses that want to evaluate the effectiveness of their advertising strategy across multiple campaigns and channels and want to determine the most profitable way to allocate their advertising budget.
There are different scenarios where one metric may be more relevant than the other. For example, if a business is running an advertising campaign to generate short-term revenue, ROAS may be a more relevant metric to use. In this scenario, the business wants to ensure that it is generating revenue from its advertising spend, and ROAS provides a quick and easy way to measure the effectiveness of the campaign.
On the other hand, if a business is investing in advertising for the long-term growth of the business, ROI may be a more relevant metric to use. In this scenario, the business wants to ensure that it is generating a positive return on its investment, considering all associated costs and returns, including production costs, overhead and taxes.
In summary, while ROAS and ROI are both useful metrics for businesses to measure the effectiveness of their advertising investments, they provide different types of information. ROAS measures the direct impact of advertising on revenue generation, while ROI provides a more comprehensive view of the financial impact of an investment, considering all associated costs and returns. Businesses should choose the metric that is most relevant to their specific goals and objectives.
The importance of knowing your marketing ROI
Knowing your marketing ROI is crucial for B2B marketers as it helps them determine the effectiveness of their marketing efforts. Here are some of the key reasons why knowing your marketing ROI is important:
- Helps optimize marketing spend
- Enables data-driven decision-making
- Facilitates better planning of future campaigns
- Improves accountability
- Enables benchmarking against industry averages and competitors
In summary, knowing your marketing ROI is essential for businesses to make informed decisions about their marketing strategy and optimize their marketing spend. It helps businesses evaluate the financial impact of their marketing campaigns and make data-driven decisions about campaign optimization, resource allocation and future planning.
The importance of knowing your marketing ROAS
The importance of ROAS lies in providing marketers with crucial information to make informed decisions about campaign spending. For instance, if multiple PPC ad campaigns are running simultaneously, it can be challenging to determine which campaigns to invest in. Should you prioritize those with the most traffic, the highest conversions or the greatest results per dollar invested? ROAS provides the answer, enabling you to optimize your budget effectively.
(Source: Business Assist)
Furthermore, ROAS helps:
- Safeguard against significant losses
- Keep costs in check
- Guide better business decisions
In summary, ROAS is crucial for marketers to optimize their campaign spending, safeguard against significant losses, keep costs in check and guide better business decisions. By measuring ROAS, businesses can make data-driven decisions that enhance their overall marketing effectiveness and drive better ROI.
In conclusion, as digital advertising continues to grow, businesses must understand the differences between ROAS and ROI to make informed decisions about their advertising investments. ROAS measures the revenue generated by advertising campaigns relative to the amount spent on advertising, while ROI measures the overall profitability of an investment, including all associated costs and returns.
By understanding both metrics, businesses can evaluate the effectiveness of their advertising strategies and allocate their advertising budgets accordingly. While ROAS is more relevant in situations where the goal is to maximize revenue generated from a specific advertising campaign, ROI is more relevant in evaluating the overall profitability of advertising investments. Ultimately, businesses must consider their specific goals and circumstances to determine which metric to use. Contact us to learn more about how our marketing services can benefit your company’s ROAS and ROI.