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Return on Investment (ROI) and Return on Ad Spend (ROAS) are important metrics for measuring the success of investments a business makes. Both ROI and ROAS can measure the effectiveness of marketing initiatives, but they have different applications.
Major Difference: ROI measures the overall performance of an investment. ROAS measures the performance of an individual advertising channel.
Definition: Return on Investment (ROI)
ROI measures the overall profit or loss generated by a business relative to the cost of an activity relative to the profit it generates.
Definition: Return on Ad Spend (ROAS)
ROAS measures the effectiveness / performance of a specific advertising campaign. ROAS is calculated as a percentage of an investment’s gains (or loses)
When to use Return on Investment (ROI)
ROI is a financial metric that is best used when trying to understand the overall effectiveness of an investment.
Some examples of these investments can be:
- Mature marketing campaigns that leverage several different advertising channels
- Sales teams
- The success of a business over a given period of time
- The success of a business unit
When to use Return on Ad Spend (ROAS)
ROAS is a metric used to understand the performance of specific advertising channels. ROAS is a helpful metric in understanding a business’s profitability but is more narrow in scope than ROI.
Some examples of where you can use ROAS to measure success are:
- Google advertising campaigns
- FaceBook advertising campaigns
- TikTok advertising campaigns
- Reddit advertising campaigns
- Twitter advertising campaigns
- Amazon advertising campaigns
How to Calculate ROI
(Gains – Costs) / Costs
For example, a business invests $500 and generates a profit of $1,000. To calculate ROI, you would do the following:
($1,000 – $500) / $500
$500 / $500
=1.0 or 100% ROI
The final answer is expressed as a percentage, so in this example 1 = 100% ROI
How to Calculate ROAS
Revenue / Advertising Costs
For example, a business generates $1,000 in revenue after spending $250 on Google Ads. To calculate ROAS you:
$1,000 / $250
=4 or 4X ROAS
ROI and ROAS are important metrics that help businesses understand the effectiveness of investment and marketing campaigns. It’s important to distinguish the difference in the metrics. ROI provides a high level look at overall performance. ROAS is a ground level look at an individual advertising channel.