Return on Investment (ROI) and Return on Advertising Spending (ROAS) are two indicators that advertisers tend to confuse. Indeed, despite being two different indicators, they affect one another significantly.
ROAS: What’s that?
ROAS is a metric that determines the return on advertising spending. That is to say, the level of profitability and efficiency of e-marketing channels. A very simple formula exists for calculating ROAS:
Revenue / Expenses
For example, you manage an e-commerce site for online sales of music records. To promote your site and get more traffic, you decide to go through Google Adwords. You have defined several campaigns and quickly got traffic. A few months later, the question arises: “Are my Adwords campaigns profitable?”.
Let’s say that your Adwords campaigns alone achieve a total turnover of €12,000 every month. Google Adwords, because unfortunately this channel has a price, costs you about €3,500 per month. If you enter these data into our formula, this gives us:
12,000 / 3,500 = 3.42
This means that for every € spent in your Google Adwords campaigns you earned approximately €3.42!
The big difference between ROI and ROAS is that ROAS gives us a ratio derived from the comparison between the amount earned and the amount spent, whereas ROI will take into account the amount earned once expenses have been subtracted. Indeed, the purpose of ROI is to answer the question “Does the expected return on this campaign justify the investment?”. At Mazeberry, we add an indicator rarely taken into account by advertisers, which is the margin rate. Taking the margin rate into account allows you to identify your actual profits and consequently calculate your true ROI on your channels. The formula for calculating ROI is as follows:
(((Turnover x Margin rate) – Expenses) / Expenses) X 100
Getting back to our example, imagine that our business has a margin rate of 20%. This would give the following calculation:
(((12000×0.2) – 3500)/3500) x 100 = -31.42%
Despite a positive ROAS, which reports in terms of sales, our ROI is negative here, because once the calculation of commercial margin is done, we realise that the investment is no longer profitable enough.
Getting to differentiating ROI and ROAS
Now that you know the difference between the two indicators, you must successfully differentiate between them in practice. Always be careful when evaluating the performance of an e-marketing channel to separate the two indicators. This will allow a clear understanding of your investments and see what lever is efficient, but also, and especially, see if it is profitable or not. Of course, it is always possible to optimise the analysis of your ROI via a web analytics tool, although you must pay attention to the attribution models used.