The ROAS concept is also very similar to the ROI concept; the only difference is that ROAS – RETURN ON AD SPEND covers all the marketing expenses instead of the total investment. What you are left with is the return on ad spend.
Formula: ROAS = Revenue from Ad Campaign / Cost of Ad Campaign
Return on investment(ROI) is the cash balance you leave after covering all the expenses to function your business. These expenses might include software licenses, office costs, vendor fees, and staff costs.
Formula: ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
ROAS vs ROI with the help of Example
A business is spending $100,000 a month on advertisements and is making $200,000. Now, its customer acquisition managers might use this specific data to minimize customers with the same budget or juggle their ad costs with customer conversion rates to maximize output. However, this data does not tell us how much the business is actually making. ROI comes into place when we want to look at the bigger picture, including all costs, and provides us with the data of how profitable the business actually is. While the ROAS is positive when spending $100,000 gives us $200,000, including other metrics such as software licenses, office costs, vendor fees, and staff costs would provide us with the actual profit.
Similarly, a store sells 10 products, each of which puts $10 in the pocket of the seller, making a total of $100. However, the profit margin might be 50% because of shipping costs, manufacturing costs, store functioning fees, etc. All these metrics leave behind just $30 in the pocket of the seller, which is the profit. $70 is the total investment, and here we are not considering the ad expense. Now that we have enough information about the basics, let’s talk numbers.
USAGES OF BOTH ROAS and ROI
Knowledge of customer acquisition costs is extremely important when you are in business. There is a certain cost associated with each customer. You may have to calculate your transportation fee, the cost of your own time, and the cost of their time, and all these metrics come into play when more informed decisions are made.
1. DECISION MAKING
When you know that the provision of a specific service costs you this much, then you know what to charge, when to upsell, and when to actually discard a service. A popular example would be Bed Bath Co., which had a market of $17 billion at its peak but failed because of poor planning and now operates under $500 million. It was a brand not too long ago but failed to capitalize on the e-commerce scale and missed this opportunity. They failed to convert their physical store customers into online ones, and in 2020, they had to close 200 of their stores.
2. PERFORMANCE EVALUATION
ROI is also used to evaluate the performance of an investment. A classic example of good performance evaluation is Amazon. They lose money in some key areas to make more in other ones. They sell their Kindle device at a loss only to make money on book subscriptions such as Kindle Unlimited and Prime Reading and made $25 billion in 2020 alone. Amazon knew no one would buy an expensive device focused only on reading, so they made it cheap and then kept charging the subscription fee. This is the correct use of customer acquisition costs at its finest.
3. Risk management
ROI is an important factor in managing investment risk. By calculating the ROI of an investment, investors can determine whether the potential returns are worth the risks associated with the investment. For example, Hindenburg, a financial research company, made money by short-selling. They knew the associated risk was massive but still continued to invest their time and money in this dangerous business of short selling because the return was meticulous as well.
4. Evaluating Campaign Effectiveness
ROAS allows a marketing agency to evaluate the effectiveness of a particular advertising campaign. This analytics helps them discard or improve their marketing efforts. For example, the Indian brand Boat, which manufactures accessories and is India’s biggest player in this segment, knew that India’s youth is passionate about cricket. Combined with the quality of their product, they were effectively able to attain a massive market share. This was all possible due to thorough research about the interests and niches of the Indian market. Because they cracked that code, they could deliver high results through an effective marketing strategy.
5. Budget Optimization
ROAS can also be used to optimize the marketing budget for a particular client. By analyzing the performance of different campaigns and channels, the agency can identify which campaigns are generating the highest ROAS and allocate more budget to those campaigns. In 2009, Ford, which used to spend millions on radio, TV, newspaper, and billboards for advertising, experimented with giving away their car to 100 different social media influencers for 6 months. All they had to do was market these cars. The Fiesta model launched by Ford Fiesta came to be one of the most successful and best-selling models ever, with 50,000 potential customers attracted all by social media. Ford was able to sell a lot by spending a minimal amount in the right place, whereas before, they were just confused about what their best-selling medium was and how to allocate their marketing funds. Since then, the automobile industry has always worked on social media campaigns to get the best of the market.
6. Client Reporting
Providing regular ROAS reporting to clients can help the marketing agency build trust and demonstrate its value. By sharing the results of its campaigns and how those results translate into revenue, the agency can show its clients that they are making a positive impact on its business. Google and all other advertising platforms provide these key insights to their clients to help them make more informed decisions.
Conclusion
In conclusion, Employing both ROAS and ROI in tandem can be highly effective in providing businesses with a more comprehensive understanding of their overall performance. Armed with this data-driven knowledge, businesses can make informed decisions about how best to achieve their desired outcomes and succeed in the highly competitive world of business.
FAQ’S
When it comes to measuring the success of your investments, there are two important metrics to consider: ROI and ROAS. While ROI is a more comprehensive measure of overall return on investment, ROAS focuses specifically on the effectiveness of individual ad campaigns. Additionally, ROAS looks at revenue generated, while ROI takes into account both revenue and profit.
To calculate your return on advertising spend (ROAS), simply divide the revenue earned from your ad campaign by the cost of that campaign. For instance, imagine a company spends $1,000 on a digital advertising campaign for a new product and generates $4,000 in revenue from sales directly linked to the ads. In this scenario, the ROAS would be calculated as follows:
ROAS = $4,000 / $1,000 = 4.
Therefore, the company earned $4 in revenue for every dollar spent on the advertising campaign.
To calculate ROI, you can divide the net income by the cost of investment and multiply by 100. For instance, if a business invests $10,000 in a new product marketing campaign, and the total revenue it generates is $15,000 while the total costs associated with the campaign amounts to $8,000, the ROI can be determined as follows:
Net Profit = Total Revenue – Total Costs
Net Profit = $15,000 – $8,000 = $7,000
ROI = (Net Profit / Investment Cost) × 100
ROI = ($7,000 / $10,000) × 100
ROI = 70%
Therefore, the ROI for this campaign is 70%. This means that for every dollar invested in the marketing campaign, the net profit is 70 cents.