Return on investment (ROI) is a significant metric to measure the performance of a company’s strategic investments and disposal of capital assets, but what about one’s return on ad spend (ROAS)? How does it fit into the big picture?

It is time to learn more about ROI and ROAS so you can define the metric that works best for you.

The differences between ROAS and ROI

While they sound similar, ROI and ROAS operate differently from each other.

ROI is a business-centric, strategy oriented metric that measures how ad expenditures contribute to an organization’s bottom line. It takes earnings into account only after expenses have been deducted.
ROAS optimizes to a tactic and is an advertiser-centric metric that measures the efficacy of a digital advertising campaign. It focuses on growing business through incremental conversions and measures gross-revenue against every dollar spent on advertising. It acts as a comparison of the amount spent to the amount earned.

Now that we’ve established the differences between ROI and ROAS, how is each one calculated?

Calculating your ROAS and ROI

How to calculate ROI

(Gains – Cost)/Cost = ROI

( – ) ÷ Total costs
=

Example: let’s say you have a product that costs $100 to produce and it sells for $200. You sell 6 of these products as a result of advertising via Google AdWords. Total sales equal $1200, but your AdWords costs are $200 with production costs of $600.

ROI = ($1200-($600+$200))/($600+$200)=50%

RELATED: How much does it cost to advertise on social media? Discover your advertising costs with the help of this guide.

How to calculate ROAS

Revenue from ad campaign/Cost of ad campaign = ROAS

÷
=

Example: Your company spends $2,000 on an online advertising campaign in a single month. During this month, the campaign yields a revenue of $10,000.

ROAS = ($10,000/$2000)=5

Therefore, the ROAS is a ratio of 5 to 1 (or 500 percent) as $10,000 divided by $2,000 = $5. In other words, for every dollar your company spends on its advertising campaign, it generates $5 worth of revenue.

Additional considerations

Remember, advertising costs include more than just the listing fee. To calculate the actual cost to run an advertising campaign, consider adding these factors into your ROAS calculation:

Partner/Vendor costs: These are customary fees and commissions associated with partners and suppliers that assist on the campaign or channel level. An accurate accounting of in-house advertising personnel expenses such as salary and other related costs must be tabulated. If these factors are not accurately quantified, ROAS will not explain the efficacy of individual marketing efforts and its utility as a metric will decline.
Affiliate Commission: The percent commission paid to affiliates, as well as network transaction fees.
Clicks and Impressions: Metrics such as average cost per click, the total number of clicks, the average cost per thousand impressions, and the number of impressions purchased.

RELATED: The best ad units to drive sales Get more bang for your buck by focusing on the best ad units for driving sales.

When to use ROI and ROAS

If you are selling a service or the goal of your ad campaign is a soft metric such as to raise awareness for your organization or to get people to attend an event, then ROAS is a great number to work from as it helps you evaluate which advertising method works best for your goal. Remember, ROAS tests tactics, so if you want to know which platform yields the greatest number of web clicks (e.g., Facebook or Twitter), you can calculate your ad spend to improve future advertising efforts.

However, as in the case of our ROI example, if you are selling physical goods with its associated production costs, you need to assess ad spend by calculating ROI. Fortunately, AdWords makes it easy for you to pass these variables to your account through the use of conversion values.

Understanding ROI and ROAS is a crucial step in launching a successful social media advertising campaign. Based on your campaign goals, continuously assess your ad’s effectiveness by drilling down into your ad numbers. This commitment will pay off by allowing you to spend your advertising dollars wisely.

by Lynn Pedotto