- Nov 23, 2020
- By Cam Sivesind
Because businesses operate in highly competitive environments, it’s important to know which marketing programs provide the best return on investment. ROI has historically been a good measure of a marketing campaign’s effectiveness. Similarly, return on ad spend, or ROAS, is a measure of an organization’s digital performance. Measuring your ROI and ROAS can be challenging, but it doesn’t have to be. Which is the best option for your business? We outline the difference between ROI and ROAS while illustrating how each can be applied to your situation to effectively measure your marketing efforts.
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What is ROI?
ROI is the process of assigning profit and revenue growth as a result of specific marketing initiatives. By determining ROI, marketers, and the organizations they work for, can accurately measure the success of their marketing campaigns at a macro or micro level.
As it relates to marketing, determining ROI has been in place, in one form or another, since the early days of marketing. If a flyer were hand distributed or an advertisement placed in a local newspaper for a dry goods store, the owner might track the revenue associated with sales after these two activities were initiated. Post activity sales could then be compared to pre-activity sales. Any increase in revenue might be attributed to the flyer or the ad, representing a rudimentary way of measuring ROI. A common formula would be as follows:
(Sales Growth (or Revenue) – Marketing Cost)/Marketing Cost = Marketing ROI
Through the years, measuring ROI has become much more sophisticated, incorporating market research strategies beginning in the 1950s to leveraging more refined attribution models to using enterprise software with advanced formulas beginning in the 1990s.
Today, more scientific methods of measuring ROI through affordable SaaS solutions are the norm as marketers strive to determine how to properly attribute every penny of revenue to marketing spend. This is excellent news for small businesses. They can now leverage technology to provide the same insight that might have been the domain of only Fortune 500 companies a few years earlier.
What is ROAS?
As is the case with ROI, ROAS measures the revenue earned for each dollar spent on advertising. The real difference between the two is the fact that ROAS measures revenue resulting from money spent on digital advertising. This is more easily tracked with pay per click ads than, say, a magazine or radio ad. The formula associated with this approach is as follows:
Conversion Value (Revenue)/Advertising Cost = Return on Ad Spend
Using ROAS for certain ad campaigns makes sense, as the method by which revenue can be attributed is more straightforward. When implementing a Google Ads campaign, or launching campaigns on Facebook, Twitter, LinkedIn, etc., using the ROAS formula can provide you with a very accurate picture of whether your ad spend is returning the desired revenue. Where ROI can often provide broad data, ROAS can be very precise.
What is a Good ROI/ROAS?
When measuring ROI and ROAS, there is more to consider than direct spending to determine every dollar earned. In other words, there are other costs associated with launching an ad campaign than simply the cost of a single click. Because there are costs associated with developing and creating an ad, writing a blog post, doing SEO analysis, and more, other costs should be considered in your overall return analysis.
Depending on your organizational objectives, ROI and ROAS will be seen as preferred, acceptable, or not acceptable. Losing money is never an acceptable outcome and ideally, simply breaking even is not adequate. Using the ROI formula we shared earlier, below is an acceptable return on investment for the sale of software that costs $5,000 but required $1500 to advertise.
(Sales Growth – Marketing Cost)/Marketing Cost = Marketing ROI
($5,000 – $1500)/1500 = 2.3, or 230%
A 230% ROI is actually outstanding. Now, let’s look at what a good ROAS might be for a PPC campaign that brings in $5,000 in revenue per month.
Conversion Value (Revenue)/Advertising Cost = Return on Ad Spend
$5,000/$1,500 = 3.3 or 3.3X ROAS
In this example, you’re bringing in $5,000 each month while your PPC campaigns cost $1,500. This does not include the costs associated with producing the ad, developing the content, affiliate costs, vendor partner costs, or more. At this rate, a 3.3X ROAS is not ideal, as you could barely treading water. If, on the other hand, your revenue was $10,000 against costs of $1,500, it could be significantly better.
$10,000/$1,500 = 6.6 or 6.6X ROAS
In this scenario, you are generating $6.6 for every $1 being spent. This ROAS means your revenue begins to cover your expenses and also allows you to grow your business. A good rule of thumb is to achieve, at the very least, a 3X or 4X ROAS. Anything below that should warrant a review of your marketing approach.
5 Methodologies to Measure ROI
There are generally 5 methods marketers use to gain insight into their marketing efforts and to determine how effective they are.
Single Attribution (First Touch/Last Touch)
A common method used for tracking marketing programs’ results is attributing the value to the first or last activity associated with the sale. This means the first person from the company interacting with the converted prospect is responsible for the sale. While this is easy to track, it doesn’t account for additional touches and influences associated with the closed deal.
Single Attribution with Revenue Cycle Projections
When you add revenue cycle projections to a first touch single attribution, there is greater understanding associated with the long-term impact of your campaigns. The good thing about this approach is that it adds focus on the impact of revenue and lead quality. The challenge is that it still does not account for other influences during the cycle.
A multi-touch attribution approach recognizes that multiple touches from multiple people are required to close a sale and there is an attempt to measure each touch. This can include those touches that are more nurturing as well as those that are lead generating. On the other hand, it may require attributing any hidden touches and may actually miss the synergy associated with the combination of certain tactics. See our complete guide to multi-touch attribution.
Test and Control Groups
Incorporating test and control groups can help determine the true impact of select marketing programs. If the test outperforms or underperforms the control group, that can provide great insight into how effective a campaign truly is. While this can help determine the true impact of a campaign, it may not provide insight into multiple programs.
Full Market Mix Modeling
To achieve a significantly more accurate measuring of your campaigns, incorporating a market mix modeling (MMM) approach can readily determine how outcomes are dependent on different touches throughout the cycle through the use of regression analysis. This approach can provide tremendous value but requires collecting a great deal of data and sophisticated analysis.
Measuring ROI for Digital Ad Campaigns
Determining ROI for digital advertising offers opportunities to refine your efforts and target your ads for greater impact. There are three ways of going about this.
1. Measuring ROI for Programmatic
When measuring ROI for programmatic advertising, such as banner or sidebar ads, the focus should be on tracking recognition and reputation (mentions, positive or negative) as well as website traffic numbers, especially those who come directly to your site by typing the URL.
2. Measuring ROI for Mobile Video Ads
Because mobile video ads are an ideal medium that fosters intimacy and impactful messaging, tracking things such as brand awareness, direct purchase influence, accessibility of the video, and how much viewers share and discuss your video is necessary.
3. Measuring ROI for Native Ads
Measuring the ROI for native ads is usually measured by click-throughs but can also be measured through customer acquisition, mindshare, brand recognition, and reputation.
Is ROI or ROAS Better?
Once you’ve had an opportunity to review and compare the pros and cons of ROI vs. ROAS, you might see that ROAS provides significantly more insight than ROI. As stated earlier, the real difference between the two is that ROAS measures revenue resulting directly from money spent on digital advertising. Because this is more easily tracked than other marketing activities (events, print ads, sponsorships, etc), it makes sense to contribute more of your marketing spend here than on other, less traceable activities. For those incorporating more traditional marketing tactics, using ROI can be helpful. For marketers focused mostly on digital/PPC campaigns, ROAS is best. At the end of the day, it’s what you can successfully measure that makes the difference between success and failure.