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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 our objectives are broader and usually company-wide. We’re looking at trimming worthless spending in all departments, not just advertising. So our mission is to find negative returns and take appropriate action.
So Which Should You Use?
The short answer is, you should use ROI if your goal is to prove financial efficacy, and ROAS if your goal is to identify top performing ads.
I like reviewing both. I try to see my work through the lens of my clients, and with retention as my primary goal, it’s important to me that my clients get value out of my work.
If advertising through a certain channel isn’t paying off, I say “catch it early and cut those expenses”. However, it’s just as important to make sure what you’re seeing in your ROI reports are showing the best advertising can possibly be.
Fully optimizing a campaign to identify top performing ad elements can be achieved by measuring ROAS. This approach is both automatable and accurate.
Whatever your measurement purposes, I wish you the most profitable ads in the coming quarter. Happy advertising!
Source: B2C
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