Updated: December 16, 2024
The terms return on ad spend (ROAS) and return on investment (ROI) are often used interchangeably in marketing, but they’re two different metrics that provide distinctive assessments of the success of your marketing efforts. As digital marketing becomes table stakes, with B2B organizations relying heavily on online advertising to attract customers and drive sales, it’s increasingly important to understand the difference between the two metrics.
In this blog, we’ll discuss the value of making informed decision to enhance the performance of your digital marketing investments. We’ll define ROAS and ROI and when and how to use each to gauge success and ensure you’re getting the biggest bang for your buck.
Gaining Insight Into the True Value of Your Digital Marketing Spend
Ad spend is increasing while visibility into accurate performance data is low. Unfortunately, without the right metrics, calculating your return is challenging, if not impossible. This makes it difficult for digital marketers to demonstrate how their efforts increase business growth and justify spend.
> $300B By 2025, the U.S. digital ad market is predicted to make up more than 3/4 of all media spending. Source: eMarketer | ~ $400B At approximately 11% growth, U.S. digital ad spend is expected to reach nearly $400 billion by 2027. Source: eMarketer | 61% Most marketing leaders don’t use ROI to drive their decisions because they don’t trust their data. Source: Business Wire |
The Value of Knowing Your Marketing Returns
Understanding ROAS and marketing ROI is essential, as these metrics provide a clear picture of how effectively your marketing efforts are driving revenue and supporting business goals. Here are some of the key benefits:
- Optimize marketing spend – ROAS helps you identify which campaigns, platforms and creative treatments yield the best returns. It enables you to allocate your budget more efficiently by focusing on high-impact activities and reducing spend on low-performing ones. ROI helps you optimize your overall marketing spend across broader activities.
- Enable data-driven decision-making – With ROAS and ROI insights, you can make informed decisions based on measurable outcomes, reducing guesswork and increasing confidence in strategic choices.
- Support future campaign planning – ROAS and ROI data highlight successful strategies and areas for improvement, providing a solid foundation for planning future campaigns with higher potential for success. ROAS aids in refining ad spend strategies, while ROI provides insights for more comprehensive campaign planning.
- Improve accountability – Knowing ROAS and ROI fosters accountability by linking marketing activities directly to financial results, enabling teams to justify budgets and demonstrate value.
- Allow for benchmarking – ROAS and ROI allow for valuable benchmarking against industry averages and competitor performance, as well as for establishing internal benchmarks over time. These benchmarks can help you understand your company’s market standing, identify areas for competitive advantage, and measure campaign success against historical performance.
What Is ROAS?
ROAS is the measure of the revenue generated by a certain ad or campaign in comparison to its cost. It’s a key metric for determining the direct impact of specific advertising efforts on revenue. ROAS is calculated by dividing the ad or campaign revenue by its cost.
Campaign revenue ÷ campaign cost = ROAS
By measuring advertising earnings against dollars spent, you can determine if a campaign is performing well or needs improvement.
For example, if your business spends $10,000 on a digital ad and earns $50,000 from that campaign, your ROAS would be 5:1. This ratio shows that for every dollar spent on your campaign, your business generates five dollars.
Yet, your ROAS metric alone can’t tell you how well your ads perform. To truly understand the success of your efforts, you need to compare your ROAS against benchmarks. A common benchmark for ROAS is 4:1, meaning many digital marketers aim for a $4 return on every campaign dollar spent. As with all measuring sticks, this benchmark needs to be carefully considered against other factors, as ROAS varies between industries, channels, products and business maturity. Once you have historical data from your own campaigns, you can set your own benchmarks for a more accurate picture of your ad performance.
A common benchmark for ROAS is 4:1
Comparing your ROAS against benchmarks can help you identify which ads or campaigns generate the most revenue so you can determine whether to fine-tune the low-performing ones or focus your efforts on those that get the best results. By continuously tracking ROAS against benchmarks over time, you’ll be able to easily identify performance trends and adjust on the fly, enhancing the overall effectiveness of your marketing efforts. And this leads us to ROI.
What Is Marketing ROI?
In comparison to ROAS, marketing ROI is the broad measure of the net profit from your marketing investment in comparison to the cost of your marketing efforts. ROI helps you to understand how your marketing initiatives contribute to revenue growth. It is calculated by dividing your profit by spend and multiplying it by 100.
Marketing profit ÷ marketing spend x 100= Marketing ROI
ROI can be specific to a campaign, or it can reflect your total marketing investment. It helps your business understand the financial impact of your efforts on the business.
For example, your total costs for a digital campaign might include content and design development, digital planning, management, analysis/reporting and ad agency fees, in addition to ad placement costs. Hypothetically, let’s say your company invests $50,000 and generates $250,000 in revenue, resulting in a net profit of $200,000. To calculate the ROI of the campaign, we can use the following formula:
ROI = ($200,000 ÷ $50,000) x 100 = 400%
This means that for every dollar invested in the campaign, the company earned $4 in net profit.
Like with ROAS, a healthy ROI depends on several factors, including the industry, campaign type, historical benchmarks and your campaign goals. Marketing ROI tends to fall between 200% and 500%.
Typical Marketing ROI
200-300% is generally acceptable
400% is solid
500% is excellent
Differences Between ROAS and ROI
The distinction between ROAS and ROI is the level of granularity involved in their calculations. ROAS focuses narrowly on ad spend relative to the revenue it generates, making it a straightforward measure of an ad’s efficiency. However, it doesn’t project the full picture of overall profitability that ROI does. The ROI calculation includes all costs and returns associated with an investment, even those not directly related to a campaign. For example, in an ROI calculation, your investment might include the cost of personnel, administrative support, equipment and tools in addition to campaign and agency costs. Likewise, your ROI calculation might also take a more comprehensive view of the revenue generated by factoring in longer-term impacts, such as lifetime customer value, customer retention value, upsell and cross-sell potential, referral value and so on.
How to Enhance Marketing Effectiveness With ROAS and ROI
How to Use ROAS
ROAS is used in various processes and evaluations across digital marketing. Here are a few ways ROAS can inform and justify your marketing decisions:
Analyzing campaign performance – You can use ROAS to assess the performance of campaigns to understand which creative elements and targeting strategies work best. It can also help you monitor the effectiveness of a new advertising channel or campaign.
Informing budget allocation and optimization – ROAS can be effective for channel-to-channel or campaign-to-campaign comparisons. By identifying the most profitable channels or campaigns, you decide where to increase or scale back investments to maximize overall marketing return.
Measuring marketing attribution – ROAS is a key metric in attribution models, which determine the value of individual touchpoints in the customer’s journey. In multi-touch attribution, for example, ROAS helps quantify the return on each interaction a customer has with ads across different platforms or formats, making it a foundational metric for measuring the effectiveness of each ad spend in contributing to conversions.
Measuring return on targeting and segmentation – ROAS enables you to assess the profitability of specific targeting criteria, such as job title, company size or geographic region. When you measure the ROAS for each segment, you can identify high-ROAS segments for optimization, expand or narrow geographic targeting based on profitability, and test and tailor messaging and creative to meet the preferences of specific segments.
Fine-tuning bid strategy – ROAS informs bid strategies for paid search and social media advertising, helping you determine which keywords and audiences justify a higher bid price, and where bids can be lowered to control costs.
Informing customer acquisition strategy – ROAS can reveal which campaigns attract high-value customers or drive the most profitable purchases. For example, if a certain audience yields a strong ROAS, you might focus efforts on acquiring similar customer profiles.
How to Use ROI
In comparison to ROAS, marketing ROI gives you a broader view of the profitability of your advertising investment. Here are a few ways ROI can drive your marketing decisions:
Measuring return on large-scale marketing initiatives – ROI helps evaluate the profitability of large, one-time investments, such as product launches, rebranding and seasonal promotions, to determine whether the financial benefits justify the costs.
Evaluating long-term growth and strategic goals – By measuring the financial impact over time, ROI provides insights into how well your marketing efforts support big-picture goals, such as revenue growth, market expansion or customer retention.
Informing budget and resource allocation – With a focus on total costs and returns, ROI helps you prioritize initiatives that drive profitability across the entire marketing mix, guiding your budget planning decisions to allocate resources to the highest-impact strategies.
Supporting accountability and justifying budgets – Marketing ROI enables your marketing team to demonstrate the financial impact of marketing activities to justify budgets and present clear value to stakeholders.
Analyzing high-level objectives beyond immediate revenue – By factoring in total costs and future returns, ROI can assess the long-term impact of broader goals, such as enhancing customer lifetime value, brand equity or customer loyalty, which contribute to sustained profitability and strategic growth, even if they don’t immediately drive sales.
Maximize Your Marketing Impact With ROAS and ROI
Getting the best value from your digital marketing investments and ad spend requires visibility into both ad performance and overall marketing impact. ROAS and ROI are valuable metrics that, when understood and applied correctly, can help you measure return and drive strong results. However, these metrics also come with complexities in both calculation and application, and misunderstandings can lead to costly missteps that impact your budget and the effectiveness of your marketing efforts.
With over 25 years of expertise in B2B marketing and a data-driven focus, Elevation Marketing can help you navigate the complexities of assessing performance from individual campaigns to overall marketing. Our tailored approach ensures your digital marketing efforts are fueled by actionable insights that enhance your success. Contact us to see how we can drive growth and help you achieve better ROI and ROAS.