Digital and eCommerce are relatively new forms of marketing. They use contemporary terms, often confusing language and several three and four-letter acronyms. We’ll focus on a couple of the most important for tracking overall performance ROI (Return on Investment ) and ROAS (Return On Ad Spend).
What is ROI/ROAS? Why is it important to measure both?
What is ROI?
ROI or Return On Investment is the revenue (or return) generated divided by the investment. ROI can be calculated across the entirety of digital or by individual activities/channels with granularity the beauty of digital marketing.
REVENUE / INVESTMENT = ROI
Ultimately, it’s a calculation of how much you’re generating for every dollar you spend.
Let’s look at an example: If you invest $5,000 and generate a $25,000 return, your Return On Investment is 5 times, or $5 for every dollar invested.
What is ROAS?
ROAS, or Return On Ad Spend, is also a measure of the Revenue (or return) generated divided by the Investment; however, in this case, it’s an investment into advertising, in digital most commonly that’s Google or Facebook.
REVENUE / AD SPEND = ROAS
Let’s look at an example of ROAS: If you invest $5,000 into Advertising and generate a $25,000 return, your Return On Ad Spend is 5 times, or $5 for every dollar invested.
Why is it important to measure both ROI & ROAS?
You’re probably sitting there thinking it’s the same thing. It’s not. The difference between ROI and ROAS is that ROAS calculates how much you’re generating for every dollar spent on advertising. Now it’s important to remember that you’re most likely paying a service fee, a retainer (or a staff member) to manage the advertising.
So let’s revisit the example: $5,000 Advertising Spend, plus $5,000 management retainer to generate $25,000 in Revenue.
ROAS = $25,000 / $5,000 = 5
I.e. your Return On Ad Spend is $5 for every dollar spent.
ROI = $25,000 / $10,000 = 2.5
Return On Investment (that’s the total investment) is 2.5.
Search Engine Marketing (SEM/PPC) is prevalent in measuring Return On Ad Spend. However, it’s critically important also to measure the Return On Investment. Remember that Return On Investment is the total invested while ROAS is only a measure of advertising spending.
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Article by
Christopher Inch – Head of Strategy
Chris is a specialist in eCommerce with over 14 years of experience in Digital & eCommerce Strategy.
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