Measuring the efficacy of your online advertising campaigns is indispensable. If done properly, it can show whether your marketing efforts are yielding the desired results. Agencies previously used Return on Investment (ROI) to gauge their ad performance, but marketers are now turning to Return on Ad Spend (ROAS). The ROI vs ROAS conundrum can be difficult as the metrics assess advertising effectiveness from different perspectives.
ROI determines overall profitability, whereas ROAS helps you select specific strategies to increase your traffic and revenue.
But that’s just the basic idea behind the two approaches. To decide on ROI vs ROAS, you also need to understand how they’re calculated, their recommended values, and ways to improve them. This knowledge will help you refine your marketing strategies to maximise their potential.
ROI stands for Return on Investment and measures how your expenditures contribute to your company’s bottom line. As the name suggests, the metric evaluates the return on particular investments relative to their cost. Put simply, it’s the ratio between net profits and investments.
Here’s the formula enterprises use to calculate their ROI:
Bear in mind that ROI considers earnings after you’ve deduced expenses.
Suppose your product costs £200 to manufacture and sells for £300. You sell eight products using Google Ads, amounting to £2,400 in sales profits. However, your ad costs are £200, whereas production costs amount to £1,600. In this case, you’ll calculate ROI as follows:
The sole purpose of the metric is to help you figure out whether your ad campaigns are worth the investment. By considering the margin, you can evaluate overall profit and calculate this metric.
Tracking ROI for your campaign performance is critical, but it can’t help you streamline your advertising strategies. It doesn’t determine whether your post-click landing pages are striking a chord with your target customers.
ROAS stands for Return on Ad Spend. It helps you determine the effectiveness of online ad campaigns by calculating your earnings for each pound spent on advertising.
The following ROAS formula divides the total revenue of your advertising strategies by their total cost:
Using the formula, your organisation can figure out ROAS values by determining these metrics:
The total revenue generated by ad strategies
The total cost of managing ad strategies
Once you obtain these pieces of information, divide them, and you’ll find out what your business earns back for every pound spent on ad campaigns. For example, if yours equals £10, it means your organisation makes £10 for every £1 spent.
In terms of ROI vs ROAS, there are several noteworthy differences. Primarily, ROAS takes revenue into account instead of profit. Second, ROAS only considers direct spending and not expenditures associated with online campaigns.
As a result, ROAS is the ideal metric if you want to see if your advertisements effectively generate revenue, clicks, and impressions. But unlike ROI, it doesn’t tell you if your paid ads are profitable.
Another major difference between ROAS and ROI is that ROAS is only calculated on advertisement spending while ROI checks total operating expenditures (marketing, R&D, human resources, etc.). Consequently, online marketers can work more easily with ROAS.
In addition, ROAS is the better option if you want to optimise short-term strategies, whereas ROI helps you assess long-term profitability.
We’ll now take a look at a practical example of ROI vs ROAS to help you understand how the methods work.
Imagine your company generates £110,000 of revenue and spends £30,000 on advertisements. On top of that, software, personnel, and other costs amount to £90,000. In this case, your team can use the ROAS and ROI formulae to work out how effective your campaigns are:
ROI = -$10,000/$120,000 x 100 = -8.33%
ROAS = $110,000/$30,000 x 100 = 366.67%
The metrics provide entirely different results. ROAS offers a positive figure, indicating your advertisements are effective. However, ROI reveals the overall strategy isn’t making you any money. In fact, it’s making a loss.
Therefore, staying on top of both ROAS and ROI is essential when running digital advertisement campaigns. Otherwise, you may invest a hefty amount of money into strategies that cost your organisation a lot of money. In contrast, you can discover that highly cost-effective campaigns aren’t generating meaningful impressions and clicks.
When it comes to deciding on ROI vs ROAS, you need to remember that each metric delves into different data. Hence, you should use both when calculating the effectiveness of your marketing campaigns.
On the one hand, ROI is perfect for determining long-term profitability. On the other hand, ROAS can help you devise short-term marketing plans.
To create a fully-faceted and robust digital campaign, both formulas will be necessary. ROI determines the overall profitability of your ad strategies, and ROAS helps you identify specific aspects to improve your efforts and generate clicks or revenue.
Calculating ROI vs ROAS doesn’t mean a thing if you don’t know what to strive for. Let’s first ascertain the ideal number for your ROAS.
An acceptable ROAS varies from company to company due to different operating costs, business health, and profit margins. Some organisations struggle to stay afloat with a 10:1 ROAS, whereas others thrive with just 2:1.
But in general, a good ROAS for your agency is 4:1. By achieving this goal, your ad campaigns will be effective and generate a good amount of revenue.
When calculating your ROAS, you should factor in several crucial details.
Partner and vendor costs – These expenditures encompass any fees or commissions paid to partners or vendors collaborating with you on your campaign. They also include the salaries of in-house employees.
Affiliate commission costs – These comprise commissions for your affiliates on each sale, network transaction fees, and payment transaction fees.
Clicks, returns, and impressions generated from ad campaigns – You should consider the costs of every 1000 impressions, the total cost per click, and the impressions.
These expenditures are easily forgotten, which can be a costly mistake. It prevents you from getting a clear picture of how efficient your campaigns are.
A good ROI should give you a 5:1 ratio. This is considered excellent for most companies, and anything under may not be enough to sustain your operations.
In addition, a 10:1 ratio is phenomenal and most likely means your campaign goals are perfectly aligned with the results. Achieving a higher proportion is possible, but it shouldn’t be your expectation.
Like ROAS, your target ROI ratio largely depends on your business environment. It varies by industry and individual cost structures.
There are numerous ways to improve your ROAS and maximise the efficacy of your digital ad campaigns:
Negative keywords are terms added to a marketing campaign that helps weed out unnecessary traffic. By including these search terms, Google stops triggering your ads when people type in these queries. Consequently, the engine only displays your advertisements for relevant searches.
The greatest benefit of negative keywords is the limited expenditures incurred while attracting irrelevant traffic that doesn’t convert.
Another great thing about them is that they enhance the clickthrough rate (CTR) of your ads. In turn, this improves your ROI.
RLSA is a robust Google Ads feature that enables you to customise your campaigns for users who have already visited your website. It lets you tailor keywords and ads, leading to effective retargeting when your target audience is browsing the web. This option is highly advantageous for your paid advertising efforts.
By analysing on-site behaviour and search queries, your company can retarget users to encourage them to revisit your webpage. This way, you can significantly increase the chances of conversion.
The third strategy can also work wonders for your marketing initiatives. It entails creating ad groups and incorporating just one keyword relevant to your offerings. This ploy has several potential benefits:
Boosting CTR
Attracting relevant clicks
Improving the rate of conversion with valuable traffic and clicks
The crucial component of this tactic is using high-value keywords to deliver optimal performance for different types of landing pages and ads. The campaign’s success hinges on this keyword, which is why you need to choose it carefully.
If you’ve hired an ad agency, you could reduce costs by switching to an in-house team. Conversely, if the in-house project isn’t yielding satisfactory results, you may want to outsource your digital marketing.
Google Quality Score keeps track of your advertisement quality and determines if your ads relate to your keywords. There are various ways to improve the score, such as using mobile-friendly extensions, optimising your landing pages, and leveraging A/B testing. As you raise your quality score, you can dramatically reduce costs and climb the ad ranking ladder.
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Targeting specific audiences allows you to focus your ad investment on users who are most likely to convert. For instance, you can design Facebook ads to target prospects based on demographic parameters. Your list can include age, interests, location, and gender.
There are several methods to maximise revenue generated by your ads. Two of the most popular ones are refining keywords and using automated bidding.
Polishing your keywords can have a massive influence on your ROI vs ROAS improvement efforts. If you restart your keyword research and target less competitive terms, your ads can gain more clicks. Therefore, the odds of your investment paying off are much higher.
Automated bidding is also a powerful ally. There are a bunch of automated bid strategies that can help you achieve your goals. The most widely-used tactics include Enhanced Cost Per Click (ECPC), Cost Per Thousand Impressions (CPM), and Targeting Outranking Share.
This point mainly concerns the ROAS aspect of your ROI vs ROAS enhancement strategies. A low ROAS can also be brought about by problems indirectly related to the ad campaign.
For instance, if your sales are high but the ROAS is low, it might mean the price of your offerings is too low. Alternatively, if the ROAS isn’t good enough, and your CTR is appropriate, the culprit may be any of the following scenarios:
Misleading ad copies
Improperly designed landing pages with unclear copies or CTAs
Complicated or lengthy checkout processes
Overpriced products or services
Determining and optimising your ROAS and ROI is vital for many reasons. First, they allow you to gauge the efficacy of your ad campaigns based on their performance. With close examination, you can pinpoint well-performing ads and scale them to boost your results. Additionally, you can get rid of or improve low-performing advertisements.
Another reason why knowing your ROI vs ROAS matters is added accountability. Understanding these metrics drives you to keep growing your company without wasting pounds on inadequate strategies.
If you’re familiar with marketing numbers, you can also make crucial decisions, such as determining your marketing budget and allocating funds to each campaign. Blind calculations are bound to cost you dearly. By relying on accurate metrics, you can reinvest in fruitful tactics, maximise your revenue, and boost other business aspects.
Deciding on ROI vs ROAS is not an either-or situation. Both metrics are integral to your organisation, pointing to the direction your marketing team should follow. By determining which strategies yield great results and which landing page UX tactics need polishing, you’ll be on the right track to achieving well-balanced digital ads.
For more advice on increasing your ROAS and ROI, get in touch with Apexure. We offer expert marketing insights guaranteed to kick your ad performance up a notch. Using our highly effective methods, you’ll have all the knowledge you need to thrive in your industry. Contact us today!
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Founder & CEO of Apexure, Waseem worked in London’s Financial Industry. He has worked on trading floors in BNP Paribas and Trafigura, developing complex business systems. Waseem loves working with Startups and combines data and design to create improved User Experiences.
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