ROI (Return-On-Investment) and ROAS (Return-On-Ad-Spend) have turned into two of the most commonly misconstrued metrics in the paid media advertising world. This lack of understanding applies to both clients and providers equally. The ongoing dilemma comes from focusing too much on the amount of money you’re making rather than clearly understanding the individuality and influence behind each PPC metric.
ROI is not the same as ROAS. They are different entities, yet affect one another in important ways. Overall, it’s imperative to identify your campaign’s ROI in order for your investment to provide instant gratification. However, you must also understand the specific channels influencing that return in order to get the greatest profit possible.
Breaking Down ROAS (Return-On-Ad-Spend)
By definition, ROAS is a metric that determines the effectiveness behind an independent marketing channel. If you’re running a Google AdWords or Microsoft Advertising campaign for your company or a client, chances are you’ll want to acquire an understanding behind the investment put forth. From a fundamental perspective, ROAS is intended for proving success behind one particular marketing channel.
Revenue / Total Spend = ROAS
For example, you have an e-commerce retail website that sells men’s clothing. In order to drive higher traffic volume and sales potential, you’ve turned to Google AdWords advertising (Good call, by the way. Google dominates nearly 70% of search market share and ultimately provides the highest exposure for a brand in search. You’re getting the most bang for the buck.).
A variety of campaigns have run for several months and the question of “Am I profitable with PPC?” tends to constantly arise. Well, are you?
Let’s plug in hypothetical numbers here to gain a realistic understanding of your situation. The total revenue generated from all campaigns in one single month equates to $7,500. Total amount you spent, or your “out-of-pocket expense,” is $1,650. Plug these numbers into the formula mentioned above for your ROAS:
$7,500 / $1,650 = Approximately $4.50
This result means that for each $1 spent in the Google AdWords account, approximately $4.50 in revenue was earned. Therefore, the ROAS ratio is nearly 5:1 resulting in profitable PPC advertising.
Comprehending ROI (Return-On-Investment)
The biggest difference between ROAS and ROI is that ROAS provides a ratio comparing the amount spent to the amount gained on one marketing channel, while ROI compares profit across multiple marketing channels. Put simply, ROI provides the “big picture” of your campaign’s profitability while ROAS shows the profitability of a single marketing channel. Therefore, the formula for ROI is:
(Profit Cost) / Cost x 100 = ROI
Using the hypothetical scenario we created above, let’s plug in the numbers.
($7,500 $1,650)/$1650 x 100 = 364
So, in conclusion our ROI equates to 364% during that particular month of advertising.
Tying It All In
When evaluating the overall performance of a marketing channel in general, whether it’s PPC or any other medium, ensure that there’s a clear separation between what is classified as ROI and ROAS. Separating both and gaining a clear understanding of each metric can assist in identifying the profitability behind individual advertising platforms in addition to the ratio per $1 spent.