ROAS vs. ROI: Your Guide To These Two Key Metrics
ROAS vs ROI: Your Guide To These Two Key Metrics
For every paid marketing campaign you run, you’ll need to measure your ROAS and your ROI.
These two metrics give you insight into how much revenue you’re generating with your campaigns, and whether or not they’re driving your business in the right direction.
But, when you’re first getting started, it can be unclear what the key differences between them are. In this guide, we’ll walk you through what ROAS and ROI stand for, the benefits of measuring them, when to use them, and we’ll highlight other related metrics to be aware of.
By the end, you’ll be ready to start using these metrics to accurately measure your marketing efforts, uncover ways to optimise your campaigns, and hit your growth targets.
What is ROAS?
ROAS stands for Return On Ad Spend. It’s a commonly-used metric, designed to tell you exactly how much you’re getting back for every £1 you spend on advertising in your business.
To calculate your ROAS, use the formula: Total Revenue Generated / Advertising Costs
ROAS can be applied to any type of ad campaign, as long as you have a way to measure and attribute revenue to the campaign.
Having a clear understanding of your ROAS on a campaign-by-campaign basis will let you understand which advertising campaigns are working, and which ones aren’t. You can then make updates and optimize them accordingly.
What is a good ROAS?
There is no exact answer to what a good ROAS is, as it depends on your business model. However, for many companies, a 4:1 ROAS or higher is a very good start. Anything lower than that, and there’s a chance your campaigns aren’t profitable enough to be viable.
But it depends — if you’re running a top-of-funnel Facebook Ad campaign to new audiences for example, your ROAS will be lower than if you’re running a bottom-of-funnel campaign targeting warm audiences who are familiar with your brand.
What is ROI?
ROI stands for Return On Investment. It shows you how much net profit you’ve made on an investment, after all expenses are taken into account.
To calculate ROI, use the formula: (Net Profit / Net Expenses) * 100
ROI usually considers costs beyond ad spend alone. For example, it also includes the costs to generate creatives, costs of goods sold, salaries, and more.
ROI is a more important metric than ROAS from a high-level business perspective. Even if your ROAS is positive, your overall ROI can still be negative. And to most CEOs, the only thing that matters is whether your marketing efforts are helping drive growth in real terms.
What is a good ROI?
If your ROI is positive, it’s a good start. That means you’re generating enough to cover your marketing expenses and survive at your current level.
However, in the long run, that will be unsustainable. You should be aiming for an ROI on your marketing of around 5:1 or above. An ROI of 5:1 of higher allows you to comfortably cover your costs of doing business, and invest further in future growth.
Naturally, depending on your business, growth stage, industry, and customer type, the ROI that allows you to grow will vary. There’s no universal “good ROI” metric.
What are the main differences between ROI and ROAS?
ROI and ROAS look similar at first. The key difference is that ROAS only considers the amount you paid for your ad campaigns as your outgoings.
ROI also considers related expenses that can push down your profits.
Here’s a real example of how they’re different.
You run a new marketing campaign, and it generates you £100,000 in revenue over the course of a quarter. But, you spent £25,000 on Facebook Ads to make that happen. You also had to pay staff salaries and consultant fees to create and manage your ad campaigns, which cost £25,000 over the same period. That brings your total expenditure up to £50,000.
Based on the formulas we’ve looked at above, we can break this down into two figures: Return On Ad Spend, and the Total Return On Investment.
ROAS: £100,000 / £25,000 = £4
That means for every £1 you spent, you generated £4 in revenue.
At a glance, that looks like an excellent return. However, in context of the business as a whole, you need to consider the costs to launch and manage that campaign.
ROI: ((£100,000 - £50,000) / £50,000) * 100 = 100%
So, you’re generating a 100% positive ROI on your investment.
That means the campaign is still profitable, but the margin isn’t as comfortable as the 1:4 ratio that ROAS gives us suggests.
ROAS is a vital metric for marketers running any paid ad campaigns to understand how their campaign is performing, but it doesn’t take into account other factors like salaries, rent, or other costs associated with creating your product/services.
When should you use ROI vs. ROAS?
There are good reasons to use both ROI and ROAS.
Using ROAS to measure marketing performance
As your company scales, you’ll often be running multiple campaigns and experiments at once. That means it’s vital to keep tabs on what’s performing well, so you can optimise where you spend your overall marketing budget.
ROAS is the ideal metric for comparing two ad campaigns next to each other.
If one campaign is generating a 2x ROAS and another is generating a 6x ROAS, it’s usually clear which one should receive the majority of your budget.
It’s an ideal metric to use to optimize campaigns on an ongoing basis and review past performance. However, it’s essential to bring ROI into your analysis to ensure your campaigns are moving you towards larger business targets.
Using ROI to assess business impact
Imagine you’re running a campaign with a 2x Return On Ad Spend. Even if you increased your expenditure on salaries or consultant fees, that wouldn’t be reflected in your ROAS figures.
However, it will be reflected in your calculations for total Return On Investment.
It’s vital to encourage your senior team to look at your ROAS in tandem with campaign ROI. It will help you see if the campaigns are actually driving growth, and if they’re worth the spend.
Your ROI will be more indicative of whether your entire marketing department is driving growth in a profitable way. If it’s not, you can find a way to either:
- Cut costs to improve your margins
- Optimise your activities to drive more profit
At the end of the day, it won’t matter how good your individual campaign ROAS (or even combined ROAS) is if your marketing isn’t generating a positive ROI.
What other metrics should you be looking at alongside ROAS and ROI?
These two metrics are a good start. But, there are other important ones to track to measure your success. Here are a few vital ones:
Customer Acquisition Cost (CAC): Your CAC is the cost to acquire a paying customer. It’s useful because it allows you to set benchmarks when creating new campaigns. For example, if your average CAC is £50, and a new campaign you’re testing has a CAC of £75, you know it’s not resonating with your ideal customer as much as it should be. However, CAC doesn’t consider how much revenue a customer generates for you.
Customer Lifetime Value (LTV): LTV refers to the revenue a customer brings in over the entire time they are a customer. It’s a long-term metric, and useful to look at in combination with ROAS, ROI, and CAC.
LTV:CAC: The LTV:CAC ratio is another key metric. It’s a direct comparison of the total revenue a customer generates for you vs. the cost to acquire that customer. It’s useful as it shows you large or small your profit margin is, and if you need to find ways to improve your LTV, or reduce your CAC to drive profitability.
ROAS vs ROI: Best used in conjunction with one another
ROAS and ROI are both effective measures of your marketing performance.
While both can be powerful performance indicators, ideally, they should be analysed together. This will ensure you’re making decisions that make sense on both a campaign-by-campaign basis, and from the higher-level business perspective.
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