When to Use ROAS vs. ROI in Your Marketing Analysis

Confused about ROAS and ROI? You're not alone. With this article, you'll finally understand the difference and master the numbers behind your marketing campaigns.

Have you ever felt a little confused when it comes to ROAS and ROI? 🙈 There's no need to be embarrassed. These two terms, which seem similar, can leave even the most experienced marketers confused.

This article is here to explain everything and put an end to the confusion once and for all.

What Does ROI Mean in Marketing?

ROI, short for Return on Investment, is a key metric that helps evaluate the effectiveness and returns of your marketing efforts. In simpler terms, it tells you whether the money invested in marketing is generating sufficient revenue and profit.

The formula for calculating ROI in marketing is quite simple:

ROI formula

ROI = (Net Profit / Cost of Investment) x 100

- Net Profit: The gain from the investment minus the cost of the investment.
- Cost of Investment: The total amount of money spent on the marketing campaign.

The idea of ​​ROI is to earn more than you invest in a marketing campaign, generating more revenue than you spend.

A good starting point for an effective ROI is around 5, meaning that for every dollar spent, you earn five. The best marketing efforts could even achieve an ROI of 10. However, if your ROI drops below 2, it means you haven't earned enough to justify continuing that marketing strategy.

💡 Please note: ROI can be represented as either a percentage or an absolute value.

What Does ROAS Mean in Marketing?

ROAS, short for Return on Ad Spend, is a marketing term that indicates how much you earn for every dollar spent on advertising.

This metric is critical for evaluating the effectiveness of your digital advertising campaigns, providing insights into the performance of your advertising efforts and guiding you in refining future strategies for better results.

ROAS formula

ROAS = Revenue from Sales / Advertising Cost

If your ROAS is above 1, it means you're earning enough to cover your advertising costs. However, if it's below 1, you're losing money after accounting for expenses.

A good ROAS is between 3-5, meaning that for every dollar spent on advertising, you earn three to five dollars in revenue, which is considered a good result for many companies.

💡 Please note: ROAS can also be represented both as a percentage and in absolute values.

ROAS vs. ROI - Differences and Similarities

Let's start with the similarities:
Both ROI and ROAS are used to measure the effectiveness of your spending. Both provide information on how much revenue is generated compared to the costs incurred for campaigns.

And now the differences:
- Scope: ROAS is specific to your advertising efforts. It only considers the money spent on advertising. ROI, on the other hand, is broader and takes into account all business costs, such as salaries, rent, and production costs.
- Timing: ROAS is like a quick check after a specific advertising campaign. It tells you immediately how well the advertising money was spent and whether you made a profit immediately. In contrast, ROI is more long-term and looks at the bigger picture over a longer period.

ROAS vs. ROI Examples

Whether things are going well, badly, or simply profitably, these examples show how ROI and ROAS work together to assess whether your marketing strategy is working.

➕ Positive ROAS and Positive ROI ➕

Let's imagine that the clothing brand Brand W decides to expand its pet accessories offering and spends €10,000 to promote them online. The campaign works great and generates €50,000 from the new accessory line.

ROAS: They got €5 in sales for every €1 spent, a 500% return if we convert that into a percentage.
ROI: After covering all expenses, such as production and shipping, they made a net profit of €20,000. A 200% ROI, showing they earned double their investment.

This example shows how ROAS and ROI, while often confused, can provide different insights into a campaign's performance.

❌ Negative ROAS and Negative ROI ❌

Imagine a tech startup, Tech X, excited about its new app. It invests €20,000 in a marketing campaign, but generates only €10,000 in revenue.

ROAS: For every dollar spent, they got back only 50 cents, a 50% return.
ROI: After covering the app's development costs, they incurred a net loss of €15,000. An ROI of -75%, indicating a 75% loss on the initial investment.

Both values ​​are negative, highlighting that the campaign did not work well.

When to Use ROAS vs. ROI

Use ROAS when you want to measure the effectiveness of a specific advertising campaign. It's useful for understanding which campaigns generate the most revenue relative to costs. For example, if you run multiple campaigns on different platforms (such as Google Ads, Facebook Ads, etc.), you can use ROAS to compare their effectiveness and decide where to allocate your advertising budget.

Use ROI when you want to understand the overall profitability of your marketing efforts. It includes all costs associated with a campaign, not just direct advertising costs. If you're trying to determine whether your overall marketing strategy is profitable or are comparing marketing profitability to other business investments, ROI is the most appropriate metric.

Conclusion

Now that you understand the differences between ROAS and ROI, you can improve your analytics and make more informed decisions. These two metrics, when used correctly, will give you a clear view of your marketing strategies, guiding you towards successful campaigns and efficient budget management.