ROI versus ROAS and the difference between profit and growth
Zane McIntyre explores the pros and cons of return on investment and return on advertising spend campaign measurement models.
Channel and campaign attribution is the pinnacle of marketing measurement for determining revenue and profits. As a result, the common question marketers and their bosses ask is, ‘did this program deliver?’ When measuring your ad campaigns, either ROI (return on investment) or ROAS (return on ad spend) is generally used. But these measurements aren’t fully interchangeable: each has its strategic uses.
ROI and ROAS explained
ROI is a method for determining profitability relative to the expense made for a program, and is reported as a percentage measurement. ROAS, on the other hand, looks at the efficacy of online ad campaigns and determines the gross revenue generated from an advertising campaign using the formula:
ROAS = revenue/expenses.
One of the biggest differences between the two is that ROAS is a ratio derived from comparing how much you spend with how much you earned, while ROI accounts for the amount you make after paying your expenses. The sole purpose of ROI is to determine whether or not the campaign is worth the investment. ROI can show a negative number, but ROAS on the other hand won’t – although it will show you if you have made a loss.
When choosing between ROI and ROAS, there are a variety of pros and cons to consider. The right decision for your business is dependent on the goals and available resources of your campaigns.
Evaluating marketing strategy versus tactics
While using ROAS as part of your ad campaign measurement allows you to determine the incremental spend and optimisation, get stuck treating it as a cost siloed to use for that specific channel as opposed to proportional profitability.
Let’s say you’re running both organic search and paid search campaigns and you’d like to determine how to generate better results. If organic search costs $5,000 and you are earning $15,000 (achieving a 3:1 ratio) as a result of executing link building and content marketing for many topics, while on the other hand you are operating a paid search campaign at a 16:1 ratio as a result of running a brand campaign, can you compare apples to apples if each channel tactic is being run separately?
Different marketing tactics affect each channel result differently, so measuring the overall marketing strategy could be an option, since you are considering the overall investment.
Timeframe and costs
Certain channel tactics like social media audience development, content marketing (whitepaper creation and promotion), video and display ads target users long before a purchase takes place.
Many times, marketers need to demonstrate short-term wins from these activities, and using ROI can make this difficult. With an increasing time frame comes recurring costs, and you can be making losses for quite some time before making a profit. Forecasting future expenditure and the opportunity cost for pursuing more profitable campaigns using ROI can slow down decision making for different marketing investment scenarios.
For example, spending on just a branded ad campaign could impact new user acquisition and revenue.
Both ROAS and ROI are both simple methods that can help management and marketers decide on whether a campaign should start or proceed or compare existing ones. If a campaign costs $400,000 and a campaign makes $600,000, then from an ROI perspective you will only need to
make sure to control your variable costs in order to continue making a profit.
From an ROAS perspective, your return is 1.5:1.
With simplicity requires context. Any seasonal, external factors and past activities are important to acknowledge when reviewing performance.
With simplicity also requires determining your campaign progress – optimising for growth or profit, depending on whether you are starting up or fine-tuning an existing campaign.
The ROAS measurement provides an advantage towards optimising for growth, while ROI is better suited towards profit.
Technology and advanced attribution
Improvements in technology provides greater insight and campaign performance tracking ability for both ROAS and ROI measurement models. ROI is increasingly adopted as marketers are being more profit-oriented in their reporting. The impossible is being made possible with many marketing analytics platforms providing different levels of effectiveness and integration solutions.
It is a double edge sword – you get out of each sequential model shown above, based on what you put into it. Based on my experience, use a mixture of models for ROAS in order to provide a fuller picture on your optimisation efforts, while using the most effective tracking solution in order to provide the best ROI measurement possible.
Exploring the pros and cons of both ROAS and ROI as the sole advertising KPI revealed that they can’t be individually used; rather ROAS is better suited for short-term tactical growth while ROI is better suited for long term profitability. At the end of the day, and as marketers, it is how we go about connecting the two together in order to generate sustainable long term results and business outcomes, through objective planning, forecasting and performance tracking.
Zane McIntyre is CEO and co-founder of Commission Factory