DorisRon
Member
ROI and ROAS turned into two metrics of media advertising world, which are often misinterpreted. This lack of understanding applies equally to both publishers and advertisers. The problem lies in the fact that market players often focus on the amount of money earned, and not on an understanding of the individual characteristics and the influence of each of the PPC-metrics.
Imagine a conversation of a marketer and CEO:
- Well, what about the cost-effectiveness of our spending?
- Everything's great. ROAS (Return On Ad Spend) amounted to 100%.
- Well. I double your budget, and you'll get the award.
Sounds great, does not it? But the question is do you know how much money the company could earn if ROAS figure is 100%?
Zero. Donut hole. Nothing!
DETERMINATION OF ROI AND ROAS
Let's start with ROI. This financial instrument, which is also called ROR (rate of return), is an illustration of the level of profitability or unprofitability of the campaign based on the amount that was invested. In other words, ROI is the return on investment. ROI measures the profit earned from advertising, in relation to the cost of its placement. This is a business-oriented metric, which is most effective in the measurement of advertising influence on growth or reduction of economic effectiveness of the company.
ROI = (income - costs) / costs x 100%
Example:
You have a site with which you are engaged in the retail online trading. In order to ensure high volumes of traffic and increase potential sales, you turned to Google AdWords. Within a few months you have spent your advertising campaigns, and you have a question: "Are my campaigns profitable?". Let's use the hypothetical figures for a realistic understanding of the situation. For example, the total monthly income of all campaigns is $ 7,500. The total amount you have spent on the campaigns is $ 1,650. Let's apply these numbers into the formula set forth above and get:
($ 7,500 - $ 1,650) / $ 1,650 x 100% = 364
Your margin equals 364% for that particular month.
Unlike ROI, ROAS (Return On Ad Spend) measures the gross revenue that is generated for every dollar invested in the campaigns. This metric allows to measure directly the effectiveness of online advertising campaigns.
ROAS = profit from the campaign / campaign costs
Example:
Let's use the hypothetical scenario, we created above.
$ 7,500 / $ 1,650 = $ 4.5
This result suggests that you have earned about $ 4.5 for every advertising dollar. Thus, ROAS ratio is about 5: 1. Not bad.
It should immediately be noted that the most preferred is the use of two metrics in tandem. However, we must remember that ROI is not the same as ROAS. They are completely different, but they have mutual influence. Simply put, ROI will help determine the campaign effectiveness in the return on investment and ROAS will provide an opportunity to prove the success of the use of a specific marketing channel.
CONTINUATION OF THE METRICS FIGHT STORY
Many experts argue that such a metric as ROI, for a long time has been used in search engine marketing in a wrong way. The true ROI formula has been replaced with a formula:
ROI = income / expenses
This formula was to be used, because ROI can be a negative number. As you know, the negative numbers make any bet calculations more complex.
In former times search engine marketing was carried out by non-specialists, and paid search was often controlled by web designers and workers of IT-departments. In those conditions, a small change in the formula did not have little or any value. However, search advertising has long turned into a multibillion-dollar business, and such inaccuracies should be corrected, and agreed upon by the different departments of the company. As you can see, the correct formula for calculating ROAS is an exact copy of ROI wrong formula, which is used by many marketers. Many people still do not see the difference between these two metrics, but if you ever have to deal with a competent CFO conducting audits, he will certainly make sure that you understand the difference between ROI and ROAS.
AN IMPORTANT WARNING MOMENT
Today's users interact with advertising and content on various channels and on different devices. According to Facebook's recent data, 32% of conversions happen using another device. This is an important point that must be considered, because ROAS model assumes measuring the impact of a single channel. But ROAS does not measure the effect of one channel to another. At the same time ROI provides insight into phasing of investment in media advertising.
ROAS is a very specific metric, maximization of which does not always mean maximization of profits. But the payback rate of advertising costs remains a powerful tool for ad campaigns optimization, taking into account real income and not just the number of conversions.
Imagine a conversation of a marketer and CEO:
- Well, what about the cost-effectiveness of our spending?
- Everything's great. ROAS (Return On Ad Spend) amounted to 100%.
- Well. I double your budget, and you'll get the award.
Sounds great, does not it? But the question is do you know how much money the company could earn if ROAS figure is 100%?
Zero. Donut hole. Nothing!
DETERMINATION OF ROI AND ROAS
Let's start with ROI. This financial instrument, which is also called ROR (rate of return), is an illustration of the level of profitability or unprofitability of the campaign based on the amount that was invested. In other words, ROI is the return on investment. ROI measures the profit earned from advertising, in relation to the cost of its placement. This is a business-oriented metric, which is most effective in the measurement of advertising influence on growth or reduction of economic effectiveness of the company.
ROI = (income - costs) / costs x 100%
Example:
You have a site with which you are engaged in the retail online trading. In order to ensure high volumes of traffic and increase potential sales, you turned to Google AdWords. Within a few months you have spent your advertising campaigns, and you have a question: "Are my campaigns profitable?". Let's use the hypothetical figures for a realistic understanding of the situation. For example, the total monthly income of all campaigns is $ 7,500. The total amount you have spent on the campaigns is $ 1,650. Let's apply these numbers into the formula set forth above and get:
($ 7,500 - $ 1,650) / $ 1,650 x 100% = 364
Your margin equals 364% for that particular month.
Unlike ROI, ROAS (Return On Ad Spend) measures the gross revenue that is generated for every dollar invested in the campaigns. This metric allows to measure directly the effectiveness of online advertising campaigns.
ROAS = profit from the campaign / campaign costs
Example:
Let's use the hypothetical scenario, we created above.
$ 7,500 / $ 1,650 = $ 4.5
This result suggests that you have earned about $ 4.5 for every advertising dollar. Thus, ROAS ratio is about 5: 1. Not bad.
It should immediately be noted that the most preferred is the use of two metrics in tandem. However, we must remember that ROI is not the same as ROAS. They are completely different, but they have mutual influence. Simply put, ROI will help determine the campaign effectiveness in the return on investment and ROAS will provide an opportunity to prove the success of the use of a specific marketing channel.
CONTINUATION OF THE METRICS FIGHT STORY
Many experts argue that such a metric as ROI, for a long time has been used in search engine marketing in a wrong way. The true ROI formula has been replaced with a formula:
ROI = income / expenses
This formula was to be used, because ROI can be a negative number. As you know, the negative numbers make any bet calculations more complex.
In former times search engine marketing was carried out by non-specialists, and paid search was often controlled by web designers and workers of IT-departments. In those conditions, a small change in the formula did not have little or any value. However, search advertising has long turned into a multibillion-dollar business, and such inaccuracies should be corrected, and agreed upon by the different departments of the company. As you can see, the correct formula for calculating ROAS is an exact copy of ROI wrong formula, which is used by many marketers. Many people still do not see the difference between these two metrics, but if you ever have to deal with a competent CFO conducting audits, he will certainly make sure that you understand the difference between ROI and ROAS.
AN IMPORTANT WARNING MOMENT
Today's users interact with advertising and content on various channels and on different devices. According to Facebook's recent data, 32% of conversions happen using another device. This is an important point that must be considered, because ROAS model assumes measuring the impact of a single channel. But ROAS does not measure the effect of one channel to another. At the same time ROI provides insight into phasing of investment in media advertising.
ROAS is a very specific metric, maximization of which does not always mean maximization of profits. But the payback rate of advertising costs remains a powerful tool for ad campaigns optimization, taking into account real income and not just the number of conversions.