Return on Investment (ROI) and Return on Ad Spend (ROAS): What They Are, When They’re Used

By John Hodge

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Ok, so how do you measure your ad spend? Do you use Return on Investment (ROI) or Return on Ad Spend (ROAS)?

Honestly, you might use both. Well, you personally might not, but within your organization there’s a time to measure your ad spend by looking at ROI and a time to use ROAS to measure your return.

Ok, great. So then what’s the difference and when do you use return on investment versus return on ad spend?

In this article, I’m going to go through the use cases of each and explain the mindset behind each measurement.

By the end, you should understand not only how each of these figures is calculated but why they’re being calculated in the first place.

Calculating Return on Ad Spend

When we’re calculating ROAS here’s the equation used:

ROAS = Revenue / Ad Spend

It should be noted that when calculating ROAS you should be using the revenue generated by that ad spend, not total revenue for the whole company. This means it’s super important to have conversion tracking set up for your campaigns that are being tracked in a CRM where a salesperson can mark a deal created from an ad-based conversion as closed-won or closed-lost.

Having proper website tagging is a necessary first step for this. So, if you haven’t already, I recommend making sure your website is tagged properly.

Alright onward, based on the equation above we know that the ROAS figure will never be negative. The least amount of revenue you can have is 0, not a negative figure.

Off the bat, we can figure that this calculation is going to be used by advertisers because a lot of automated systems and bid adjustment scripts will malfunction with negative numbers.

The Thought Process Behind Return on Ad Spend

When calculating ROAS we’re solely focused on the success of specific ad elements relative to each other. Which advertisement, ad group, keyword, etc generate the most return?

In this mindset, you’re saying “Okay, we’re advertising and reporting on those ad elements, so where are the winners and where are the losers?”

We’re going to talk about how that’s different from the mindset behind return on investment next. First, let’s discuss how ROI is calculated.

Calculating Return on Investment

When we’re calculating ROI here’s the equation used:

ROI = ( Revenue – Cost ) / Cost

Similarly to ROAS, when calculating ROI in advertising you should be using the revenue generated by that ad spend, not total revenue for the whole company.

Again, proper website tagging is a necessary first step for this.

Based on the equation above we know that the ROI figure can be negative. Ruh-roh, what does that mean?!

We can say that this equation will mostly be used by an accountant, CFO, other financial department personnel or a Director of Advertising.

The Thought Process Behind Return on Investment

When calculating ROI we’re focused on the effectiveness of advertising as a whole.

In this mindset, you’re saying “Okay, we’re advertising now, but we don’t have to. So, is it working or not?”

When reviewing advertising spend through this lens Go to the full article.

Source:: Business 2 Community

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