By Chantal India, on 12 March 2024
ROI (Return On Investment) and ROAS (Return on Advertising Spend) are two fundamental Key Performance Indicators (KPIs) in marketing. ROI gauges the overall returns a company has earned through both online and offline channels concerning the investments made. On the other hand, ROAS measures the effectiveness of an advertising campaign by considering the gains obtained through it against the investment made in advertisements.
While these two metrics provide different insights, they are equally valuable for businesses involved in online sales. They offer information about the benefits obtained compared to the investment made. Given that they are distinct KPIs, different formulas are used to calculate them.
Calculating ROI and Example Usage
To calculate ROI, the following formula can be used:
ROI = (Gain from Investment-Cost of Investment/Cost of Investment) × 100
For instance, if an investment of $10,000 results in gains of $12,000, the calculation would be:
ROI = (12,000−10,000/10,000 ) × 100 =20%
In this case, the ROI would be 20%, signifying a $20 profit for every $100 invested. A higher ROI indicates more efficient use of resources and yields greater profitability or value relative to the initial investment.
It's important to apply the formula once all returns on investment have been realized, as occasional long-term benefits may lead to inaccurate results. Calculating ROI for each action taken can help you identify the most profitable ones. Regularly reassessing this gives you a more comprehensive overview and facilitates more informed decision-making.
Calculating ROAS and Example Usage
Calculating ROAS requires two pieces of data: total revenue obtained and the cost of advertisements. The formula is as follows:
ROAS = (Revenue/Cost of Ads) × 100
For example, if $1,500 is invested in advertising, resulting in revenues of $2,000, the calculation is:
ROAS = (2,000/1,500) × 100 = 133.33%
This means that for every dollar invested in advertising, a profit of $1.33 is obtained, representing a 133.33% gain for that specific campaign. Similar to ROI, a higher ROAS indicates a more successful campaign.
ROAS can be calculated before the end of an advertising campaign to gauge its effectiveness. While the actual performance is determined at the campaign's conclusion, calculating ROAS beforehand allows you to make adjustments to meet established objectives.
When to Use ROI vs. ROAS
ROI and ROAS are two distinct yet equally important metrics. ROI provides information about overall investments, considering all expenditures like personnel, tools, and other costs, against the profits earned. In contrast, ROAS solely analyzes the success of an advertising campaign without considering the tools used, the cost of the human resources involved, management fees, and other expenses. Both marketing metrics are entirely compatible and can be used together to determine, in a more global and precise manner, what is profitable for the company and what benefits it accrues.
ROI should be applied to all investments, from digital marketing campaigns to infrastructure improvements, acquisition of new tools, or event preparation and hosting. It is also useful for assessing (based on past results and performances) how much can be gained from a new investment. In essence, it provides insights not only into past actions but also guides future directions, preventing excessive investment without achievable returns and helping to define realistic goals.
ROAS, on the other hand, should be applied when the goal is to understand the effectiveness of an advertising campaign. With this KPI, the only thing that matters is whether a strategy has been profitable from the perspective of advertising investment, without taking into account the resources used. This metric is the best indicator of whether ads are genuinely effective in generating clicks, impressions, and revenue. A negative result indicates that the ads are not attractive or compelling enough, proper segmentation is not being done, or they are not in the right place, among other reasons.
Properly tracking ROI and ROAS allows you to understand the impact of individual and overall campaigns, evaluating their outcomes, and making adjustments based on the established objectives. This is why both metrics, despite their differences, are important and can work together.
Strategies to Improve ROI and ROAS
When your ROI or ROAS results fall short of expectations, there are certain practices or strategies that can help improve them. The following advice is applicable to virtually any type of company, as ROI and ROAS are two metrics that are currently useful for any brand.
One of the most basic and essential strategies to improve ROI is learning to control expenses. This involves evaluating and distinguishing between essential and non-essential expenses. Once identified, it is beneficial to minimize or even eliminate those that are expendable. Focus on increasing performance and optimizing, especially when it comes to more mechanical and tedious tasks.
When aiming to enhance ROAS, focus on the advertising strategy. Question what can be improved or what possible errors are being made. Ads are a means of differentiation from your competitors, so the product or service must be presented in an attractive, compelling, and, above all, original way. A/B testing can also be performed to find the option that yields the best results.
In both cases, whether the goal is to increase ROI or ROAS, it is essential to have clear and well-defined objectives. These objectives should be specific, measurable, achievable, relevant, and time-bound.
The next step is to focus your efforts towards the right audience. This means advertising on the channels and platforms where your target audience spends time.
You should always look for ways to improve and track your investments based on the results obtained. 
