Okay, so you’re ready to run your paid ads…but you might be wondering how to really understand if they’re working for you. This article breaks down how to easily run the numbers to determine if you are heading in the right direction, whether you work with an agency or run them yourself.
Return on Ad Spend (ROAS) and Return on Investment (ROI) may sound similar, but their importance in your strategic investments operates entirely differently from one another. Explore the differences between the two concepts so that you can understand how to calculate each and meet your company’s specific digital marketing goals.
The Differences Between ROAS and ROI
ROAS is often mistakenly calculated as ROI. However, not only do their calculations differ, but the purpose of each can significantly impact the way your company interprets its data from digital marketing.
Return on Investment (ROI) is the business-driven statistical analysis that measures the investment returned (after expenses contributed to ad campaigns have brought in revenue.) This return is only calculated as an earning after you’ve accounted for all advertising costs.
By contrast, Return on Ad Spend (ROAS) focuses more on the advertiser’s side. It measures the efficacy of your advertising campaigns by understanding how much money results per dollar spent. You can calculate ROAS for various initiatives, from focusing on just one ad to understanding your returns from annual advertising expenditures.
How to Calculate ROAS
Calculating ROAS is more straightforward than it seems. Consider this example: You have decided to spend $1,000 on a digital advertising campaign. It generates $5,000 in revenue for your company. You would calculate your ROAS by dividing your revenue by the money invested in the digital advertising campaign, or in this case, $5,000 divided by $1,000. Your ROAS for this campaign would be 500% or a ratio of 5-to-1. The more effective your digital advertising campaign is, the higher your calculated ROAS will be.
How to Calculate ROI
Understanding the calculation for ROI adds an extra factor for businesses to pay attention to their bottom line. For this scenario, we focus on the campaign’s total revenue and subtract the cost before dividing it by the cost itself.
For example, let’s say a specific advertising campaign has brought in a revenue of $10,000, but the cost of the campaign was $2,000. First, we would subtract $2,000 from $10,000, leaving $8,000. Then, you would divide your revenue with the subtracted cost by the total cost, or $8,000 divided by $2,000, resulting in 4. That leads us to a ratio of 4-to-1, or an ROI of 400% for this advertising campaign.
Key Takeaways From the Concepts
Now that you understand the differences between ROI and ROAS and are comfortable with their separate calculations, you can focus on how the data benefits your company. ROI drives the decisions created by most companies, but focusing on the ROAS can be the deciding factor in ensuring you receive the most value for your digital marketing ventures. Improving your ROAS from here can involve simple steps. Consider eliminating extraneous costs, ensuring that the content of each advertisement fits your needs, and timing the release of your advertisements appropriately. With a better understanding of your returns, coupled with the help of a capable digital marketing team like LMH Agency, your revenue is sure to grow exponentially.