ROAS vs ROI: What’s the Difference?
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Pathlabs Marketing |
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September 13th, 2024 |
ROAS this, ROI that. Understanding ROAS and ROI is key for marketers and digital media experts. Do you know your stuff?
This post will walk you through the differences between ROAS and ROI and how to leverage this knowledge for maximum impact in your upcoming digital media execution efforts.
What’s the Key Difference Between ROAS and ROI?
ROAS (Return On Ad Spend) and ROI (Return on Investment) are both important metrics, but they measure different things and come into play in different cases.
ROAS is primarily used in digital media execution and tells you how effectively your digital media advertising dollars are driving revenue.
ROI provides a complete picture of whether your overall business and marketing investments are profitable after all costs are taken into account.
With ROAS, think of it as gross revenue generated for every dollar spent on digital media advertising, directly reflecting your ads’ impact on driving conversions and sales. ROI takes a broader perspective, considering all costs and returns associated with your business or marketing efforts beyond just ad spending.
In digital media execution, when managing media buying and launching ad campaigns, teams tend to focus more on ROAS than ROI, as it directly measures the success of campaigns based on ad spend and revenue generated, the metrics those teams generally have access to
However, it’s common to hear the term “boosting ROI” in conversations about digital media and advertising strategies, as it conveys the idea of maximizing overall returns. Still, when measuring day-to-day campaign performance, ROAS tends to be the primary focus.
What Is ROI?
ROI, or return on investment, is a metric used to evaluate the overall profitability of an investment. Evaluating ROI is essential because it gives you a comprehensive view of how well your business or marketing investments are paying off.
In the context of business and marketing, investments can include a wide range of activities, such as investing in:
Digital media execution activities within a specific channel.
New tools or technologies.
Implementing content marketing efforts.
Partnering with a new service provider or vendor.
The idea is that businesses and marketing teams allocate resources—such as time, money, and effort—toward investments with the goal that they will drive revenue returns. ROI calculations measure the returns generated after the investment is made.
Importantly, ROI considers a broader range of costs, including operational expenses, overhead, and other associated costs, to assess the overall profitability of the investment.
What Is ROAS?
ROAS, or return on ad spend, is a metric used to measure the revenue generated for every dollar spent on advertising, providing a direct view of how effectively your advertising budget is performing.
ROAS is particularly useful for assessing the immediate impact of your individual media campaigns, where results can be tracked in real time. By monitoring ROAS, marketers and digital media teams can make quick pacing and optimization decisions on whether to scale, adjust, or pause campaigns to ensure that they are maximizing returns.
At Pathlabs, we work closely with independent agencies, assisting with the execution of digital media campaigns for their clients. Our focus is maximizing ROAS through cutting-edge media execution strategies, ensuring that every dollar spent on ads delivers optimal revenue for these agency clients.
In addition to looking at ROAS for the ad campaigns we execute, we analyze and report on otherimportant digital advertising KPIs and metrics likeCPM, CPC, and CPA to paint a more holistic view of campaign performance.
Comparing ROAS vs ROI
Scope of Measurement
The primary difference between ROAS and ROI lies in their scope of measurement. While ROAS is great for assessing the immediate performance of your ad campaigns, ROI is essential for understanding the long-term value of a business or marketing investment.
ROAS focuses narrowly on the revenue generated from advertising spend alone. It’s a metric that tells you how effectively your ad spend for a campaign is driving sales, but it doesn’t consider the broader context of your overall marketing investment.
ROI takes a much broader view. It encompasses all costs associated with taking on an investment and provides a holistic view of whether your investment – whether that be investing in executing media within a given channel or another type of investment – is truly profitable.
Calculation Method
ROAS and ROI are each calculated in different ways, leading to different interpretations of success.
ROAS is calculated by dividing the revenue generated from your ad campaign by the cost of serving those ads. This straightforward calculation gives you a clear picture of how much revenue each dollar of ad spend is generating.
ROAS is mainly calculated and presented as a ratio. There may be cases where it is expressed as a percentage – especially in case studies explaining how a certain campaign strategy drove high returns on the ad spend put into it.
ROI is calculated by dividing your net profit (revenue minus all costs) by the total investment cost. This is the most common calculation, and it yields in the form of a percentage.
The associated costs for an investment can vary, including expenses like overhead, labor, access to technology, and additional service fees. Depending on the type of investment, the industry, and the entity calculating it, ROI calculation formulas can come in several additional variations.
Measurement Precision
The accuracy of ROAS and ROI calculations depends on the quality and completeness of the data used.
ROAS is generally easier to measure with precision when executing digital media campaigns on channels like display, paid search, and paid social, to name a few. The ad-buying platforms or additional tools used for the execution of these campaigns can calculate both the ad spend and the revenue generated. This makes ROAS easier to track in real-time or over the entire flight of a campaign, though it remains focused on individual campaign performance.
It’s important to note that for accurate ROAS calculations, you must reliably track both campaign spending and the conversions and, in turn, the revenue driven by those conversions. Most ad-buying platforms will support this conversion tracking and provide the necessary data for calculating ROAS.
However, remember that this conversion tracking must be set up correctly, and even some platforms use modeled conversions, meaning you might see a difference between the conversion data reported by platforms like Google or Meta Ads and data from other tools tracking conversions and revenue.
ROI is more comprehensive and can definitely be more challenging to measure with precision. This is because, once again, ROI requires a full accounting of all costs associated with a business or marketing investment – which is difficult to calculate in the first place because you must know which costs to include. While it can be even more difficult to attribute the revenue and return directly brought on by this investment.
Interpretation
Interpreting the results of ROAS and ROI requires understanding what each metric is designed to reveal about your business and marketing efforts.
While ROAS can tell you how well your ad campaign dollars are working to drive revenue. ROAS is primarily concerned with efficiency. A high ROAS indicates that your ad spend is generating a significant return in terms of revenue, suggesting that your ads are performing well.
While a high ROAS is a positive sign, it doesn’t necessarily guarantee overall profitability. It simply shows whether the revenue generated exceeds the ad spend.
ROI provides a more comprehensive interpretation of success for an investment. It considers the total costs associated with your investment and compares them to the net profit generated.
For example, a marketing team might invest in executing digital media campaigns, performing content marketing efforts, and implementing newsletter marketing initiatives. The ROI they calculate would assess the total costs of all these investments and how they relate to the revenue driven, making ROI a more reliable indicator of the overall financial impact of the marketing strategy.
For ROAS, this will remain focused only on the individual digital media campaign efforts, the amount spent for serving the ads, and the amount in return.
Time Frame
The time frame over which you measure ROAS and ROI can impact how these metrics are interpreted and applied in your marketing strategy. While ROAS is valuable for short-term optimizations and quick wins, ROI provides a more comprehensive view of a business or marketing investment’s effectiveness over time.
ROAS is generally measured over shorter periods, such as the duration of a specific ad campaign or even on a daily basis. This short-term focus makes ROAS ideal for assessing the immediate impact of your ad spend and making quick adjustments to optimize performance.
ROI is typically assessed over a longer period. It’s about understanding the profitability of an entire investment over weeks, months, or even years. It takes into account the cumulative effect of all expenses, making it a better metric for evaluating long-term success and strategic decision-making.
Which Metric Should You Use?
When to Use ROAS
Focus on ROAS when you’re looking to optimize specific digital media campaigns and need quick insights into how efficiently the ad spend is converting to revenue. ROAS is particularly relevant in these situations:
Real-Time Optimization: In fast-paced digital media channel environments like programmatic advertising, where campaigns are adjusted in real-time, ROAS provides immediate feedback on which ads are driving the best revenue returns.
Single-Channel Campaigns: When running campaigns on a single platform, such as Google Ads or Facebook, ROAS offers a straightforward measure of how well your ad spend is performing in that specific channel.
Short-Term Goals: If your primary objective is to boost sales quickly, such as during a season promotion or a flash sale, ROAS helps you track and optimize your efforts to maximize revenue.
Ad Budget Allocation: When deciding where to allocate your ad budget across different campaigns or channels, ROAS can serve as a good guide for where to direct funds.
When to Use ROI
ROI is the metric to prioritize when you’re evaluating the overall profitability of a business or marketing investment. It’s particularly useful in the following scenarios:
Long-Term Planning: When you need to assess the effectiveness of your entire business or marketing strategy over time, ROI provides a comprehensive view of how well your investments are performing.
Justifying Marketing Spend: When presenting results to stakeholders or making decisions about future budget allocations, ROI is crucial because it accounts for all costs and provides a clear picture of overall profitability.
Maximizing Digital Media Success with Pathlabs
At the core, ROAS and ROI aim to answer the same question: Are the resources we’re investing in certain efforts delivering sufficient value in return?
This is particularly important in paid digital advertising, where brands and teams execute media campaigns across channels like display, native, OTT/CTV, paid search, paid social, etc. Having a metric that provides insight into whether the spending is worthwhile is crucial. In a pay-to-play environment, without a clear indicator of success, your budget can be quickly depleted without a strong sense of the impact.
ROAS is a go-to metric for many ad campaigns for digital media teams and advertisers. It focuses on efficiency—showing how well your ad spend drives revenue. Conversely, ROI provides a broader perspective, encompassing all costs and returns from an investment. While ROI is valuable for evaluating overall business and marketing strategies, ROAS is typically the primary gauge for measuring individual campaign success.
At Pathlabs, we act as a Media Execution Partner (MEP), providing independent agencies with the people, workflows, and technology to execute digital media campaigns effectively. We work closely with agencies, helping them deliver the highest possible ROAS for their clients’ digital media execution efforts.
Schedule a free strategy call to learn how we can help you optimize ad spend, increase profitability, and drive sustainable growth for your clients.
