If you’re a digital marketing professional or an eCommerce owner, two of the most important metrics you need to know are Return on Investment (ROI) and Return on Ad Spend (ROAS). These two metrics let you measure the effectiveness of your marketing campaigns and adjust your strategies to maximize your profits. Let’s see how to calculate these two essential metrics.
Return on Investment (ROI)
ROI is used to measure the profitability of an investment. In marketing, ROI represents how much money you make (or lose) relative to the total cost of a marketing campaign. It isn’t limited to ad spend; it also includes other associated costs, such as content creation, time invested and technical costs, among others.
To calculate ROI, use the following formula:
ROI = (Net return on investment – Cost of investment) / Cost of investment * 100%
For example, if you spent €1,000 on a marketing campaign and generated €4,000 in direct sales from it, your ROI would be:
ROI = (€4,000 – €1,000) / €1,000 * 100% = 300%
This result means that for every euro you spent on the marketing campaign, you earned €3 in profit.
Return on Ad Spend (ROAS)
ROAS is a metric used specifically to measure the effectiveness of an online advertising campaign. It helps you understand how well your ad spend is generating revenue.
To calculate ROAS, use the following formula:
ROAS = Ad revenue / Ad cost * 100%
For example, if you spent €500 on ads and generated €2,500 in sales from those ads, your ROAS would be:
ROAS = €2,500 / €500 * 100% = 500%
This result means that for every euro you spent on advertising, you generated €5 in sales.
The difference between ROI and ROAS
The main difference between ROI and ROAS is that ROI provides an overall view of a marketing campaign’s profitability, taking all associated costs into account, while ROAS focuses specifically on the profitability of ad spend. Both metrics are valuable for a company, but how they’re applied will depend on the company’s specific goals and marketing strategy.
Keep in mind that while ROI and ROAS are useful metrics, they shouldn’t be the only ones you use to evaluate the success of your marketing campaigns; there are others, such as POAS. Other factors such as new customer acquisition, customer retention, customer lifetime value and customer satisfaction are also vital to your eCommerce’s long-term success.
In short, ROI and ROAS are essential tools that can help you better understand the performance of your marketing and advertising campaigns, and they let you make informed decisions to optimize your strategies and maximize your profits.
