The Difference Between ROAS and ROI in PPC Marketing
by Lucy Greenaway
Measuring Ad Spend And PPC Marketing Performance
Being able to understand the importance of measuring your ad spending and your PPC marketing performance will allow you to maximise your return on ad spend and subsequently your return on investment. Measuring your online advertising campaigns is a key skill within digital marketing. Online campaigns can have high overall profitability but to have long-term profitability you need to be able to assess the direct spend in the ad campaigns you're running to judge whether or not the marketing strategies in the digital ad campaigns are generating conversions.
The importance of measuring your PPC marketing performance
Being able to measure the effectiveness of your PPC marketing performance is crucial to ensure that you are getting more out of it than you are putting in. These metrics used to measure will allow you to understand the cost of your PPC advertising and whether your budget is actually being used effectively in your advertising campaign.
PPC metrics like clicks, impressions, click-through rate and conversion rate provide you with valuable insight into how your campaigns are performing and whether or not the performance is a reflection of your marketing efforts or if the campaign performance is wasting ad spend.
Understanding ROAS
ROAS stands for Return On Ad Spend, and this is one of the most important metrics in digital advertising.
Return on ad spend and its formula
ROAS is calculated by dividing the revenue that is generated from an advertising campaign by the amount that has been spent on that campaign.
The formula for this is:
ROAS = Revenue/Ad spend
An example of this would be if you were to spend £10,000 on an ad campaign and your advertising efforts and overall campaign performance achieved total revenue of £500,000 then your Return on Ad Spend would be 5,000%.
If you are still struggling with calculating ROAS or want to save time when trying to calculate ROAS? - check out our ROAS Calculator.
A good percentage to aim for when assessing your return on ad spend would be over 800% as a general rule but this varies from industry to industry.
Advantages of using ROAS to measure your PPC performance
Using ROAS to understand the performance of your advertising campaign gives you a far better idea of the total revenue generated from your ads (search ads, display ads, shopping ads etc). Having this knowledge allows you to assess your marketing budget and whether or to your marketing strategy (short-term strategy or long-term) is gaining you a good level of customer lead.
Understanding ROI
In addition to ROAS, ROI (return on investment) is another one of the fruitful tactics that online marketers use to assess the overall profitability of marketing campaigns.
Return on investment and its formula
So how do you calculate ROI? ROI is formulated by subtracting the cost of the investment from the revenue that the investment generated and then dividing this by the cost of the investment. The formula for ROI is:
ROI = (Revenue - Cost)/Cost
For example, if your investment was £1,000 and the returned amount is £10,000, this would be a gain of £9,000 and therefore your ROI would be 900%.
Advantages of using ROI to measure your PPC performance
One of the key advantages of using ROI helps to measure and compare the performance of different campaigns or other marketing channels. In this instance, ROI reveals what specific strategies are working and generating sales or clients and lets you identify what overall strategy would gain the most overall profit moving forward.
Differences Between ROAS And ROI
While ROAS and ROI can seem pretty similar there are some differences between the two and they should be used in different situations when applying them to your overall project as a tool to assess your ad campaigns.
Key differences between ROAS and ROI
ROAS is often used for short-term campaigns in which the primary goal is to generate revenue fast. However, ROI is typically used for long-term campaigns requiring investment to expand profitability.
Both of these metrics can be used on one campaign to help you make data-driven decisions on how to optimise the account best (for example when deciding to automate bidding).
Limitations of both metrics
As helpful as these metrics are, they don't come without their limitations. For example, these metrics can only ever be as useful and as accurate as the information on which you're basing these calculations. These calculations also don't take into account the value of money in terms of time. The value of time is different for every business so while the ROAS or ROI may look good on paper, the ad spend or investment could actually be negative. Another thing to consider is that these metrics do not factor in other expenses like salaries overhead costs or other advertising costs.
Tips for overcoming challenges and limitations
While these challenges and limitations exist within the scope of using ROI and ROAS, there are ways that you can limit and mitigate these obstacles in order to get the most out of these metrics.
Firstly you will want to ensure that the data you are using when trying to calculate ROI or calculate ROAS is as accurate and up-to-date as possible. It's best to use a 'rubbish in = rubbish out' approach when using Roi and Roas, as you will get out of it what you put in.
Next is to consider the time frame you are looking at and the context of how you are looking at this data. One positive or negative calculation of ROAS or ROI isn't a reflection of the overall business value, there are other costs and advertising strategies that come into play when considering the context of the results from your ROAS and ROI.
Lastly, use other metrics to supplement your report on the performance of your marketing campaign to help you decide how much revenue is coming from the advertising spend and whether or not your advertising tactics are giving you the ideal profit.
