What’s the difference?
Return on Investment (ROI) and Return on Advertising Spending (ROAS) are two indicators that advertisers tend to confuse. Despite being different they affect one another significantly.
So what exactly is ROAS?
ROAS is a metric that determines the Return On Advertising Spend – the level of efficiency and profitability of e-marketing channels. The formula of ROAS is quite simple.
Revenue ÷ Expenses
Imagine you are marketing an e-commerce site and you want to increase traffic. You develop a number of Google Adword campaigns which quickly delivery an increase. Later down the line you analyse your campaigns for their profitability, and you discover that your campaigns achieve a total turnover of £20,000 per month at a cost of £5,000 per month.
20,000 ÷ 5,000 = 4.00
So for every £ you spent on your Google Adwords campaigns you earned £4.00
ROI differs from ROAS as ROI takes into account the amount earned once all expenses have been subtracted. In this example the purpose of ROI will determine whether the expected return on these campaigns justifies the investment? You then have to take margin rate into account which will allow you to identify your actual profits and calculate your true ROI on your channels. The formula for calculating ROI is as follows:
Turnover x Margin rate – Expenses ÷ Expenses x 100
Imagine that your business operates on a 20% margin rate, which would give you the following calculation:
20,000 × 0.2 – 5,000 ÷ 5,000 × 100 = -20.00%
Despite the ROAS being positive in terms of sales, the ROI is negative as when you apply the margin calculation, it indicates that the campaign investment isn’t profitable enough.
ROI and ROAS differentiation
When evaluating the performance of an e-marketing channel be sure to separate the two indicators, as this will give you a clear understanding of your investments and whether they are profitable or not.