Metric Talks: The Incremental Difference Between ROI and ROAS

Hint: There is a winner and it’s a game changer!

Back a few years ago, if you’d said that you use ROAS (Return on Ads Spend) as a success metric for your ads campaign all you’d probably get was laughter. However, trends come and go, the water keeps flowing under the bridge and digital marketing alters with the winds of change more than any other industry. It makes sense, after all.

However, while that was the case a couple of years back, now the terms ROI (Return on Investment) and ROAS are used interchangeably. If you are a geek, though, much like us, you’d know that there is a fundamental difference. And since everyone is so hyped up about data and metrics, let’s dig a bit deeper.

If there is one question that we at Rioks love to ask ourselves prior to putting out anything, including this particular piece, it is “So What?”. So there is a difference between ROI and ROAS – So What? Well, the truth is that in the context of contemporary marketing where digital campaigns oftentimes hinge on the brink of profitability, the difference between those two metrics could turn out to be quite substantial.

So, the question is – should you measure the success of your campaigns with the return on your investment or the return on the ads spend?

Well, this is where things get tricky. As it is with almost everything else in our field, the answer requires a lot of digging.

Defining ROI and ROAS

It all comes down to the approach. ROI optimizes to a strategy. ROAS, on the other hand, optimizes to a tactic. However, there are still marketers who are comfortable using the terms interchangeably. That’s a bad practice.

ROI will measure the profit that you’ve generated with the ads, relative to the cost of those specific ads. It is a business-centric metric. The thing here is that it is most effective when it comes to measuring the way ads contribute in general to the bottom line of your organization. Oh, and, by the way, ROI is a percentage metric (I know it’s not that fundamental of a difference but I felt the urge to point it out. Hey, geeks will be geeks, right?).

Your ROI formula would look like this: ROI = PROFITS-COSTS x 100 / COSTS

Now, let’s have a look at the situation with ROAS. This is a straightforward marketer’s metric. Marketing here is considered a necessary cost of doing business at all (ROI sees marketing as an investment in future growth only). That’s where the incremental difference plants its roots. ROAS measures the GROSS revenue which is generated for every single marketing dollar that is spent on ADVERTISING.

Your ROAS formula would look like this: ROAS = Revenue from Ad Campaign/costs OF AD CAMPAIGN

Now, here comes the actual deal breaker. The ROAS model could exponentially increase the marketing dollars spent on advertising where marketers seek additional market share without having the financial discipline of seeking a well-defined and pre-determined profit margin. The latter keeps your spending in tight check, making sure that you only invest as much as your margins allow you to.

In other words, it could lead to advertisers spending more than they should without being able to get a hold of the overall foundation of every single dollar spent on media.

Marketers get so caught up on not missing that single impression that they forget to step back and consider the benefits of actually missing it.

Digging Deeper

Unlike years ago, consumers tend to interact with ads and different content throughout a range of different channels and platforms, as well as on different devices. This means that we have already entered channel-base silos while we are stuck in a centric ROAS model where marketers treat advertising as a cost which is isolated in one specific channel. What is more, this model fails to account for the impact that different channels have on each other. This, on the other hand, is reflected in the old-school ROI model. It turns out that old truly is gold.

So What?

Here it is – our favorite question. Well, it’s clear that the costs of advertising are only going to get higher. This, combined with the fact that there is an availability of comprehensive attribution alongside offline measurements clearly steers the industry away from the marketing-centric ROAS model.

It sounds odd, doesn’t it? We are operating in an industry where we run away from the industry-specific metrics? Well, think about it – is there an industry which is as encompassing as marketing?

We told you that there is a game changer!