Understanding ROAS vs. ROI: Which one matters the most to your clients?
Pay-per-click (PPC) advertising serves up plenty of data to help track and assess the effectiveness of your digital ad services. You can use this information to determine return on ad spend (ROAS) and return on investment (ROI) and get insights into performance.
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Although the two metrics sound similar, they’re not interchangeable. It’s critical to understand ROAS vs ROI as distinct advertising benchmarks, so you can use the most relevant one to help clients track progress toward their goals.
What is the difference between ROI and ROAS?
We’ll dig into the details below, but let’s lay the groundwork first. Here are the basic differences between ROAS and ROI:
- ROAS is a campaign-specific metric that looks at the return per advertising dollar spent.
- ROI is a profitability metric that considers net income after deducting marketing expenses such as advertising placement, salaries, software, and agency fees.
You’re not alone if ROI and ROAS are thorns in your marketing side. According to one study, 17 percent of marketers find ROAS difficult to prove and 34 percent feel that it’s hard to demonstrate ROI (Ruler Analytics).
The below table offers a side-by-side comparison of the two metrics, including quick ROI vs ROAS calculations.
| ROAS | ROI | |
| What it is | Sales generated per advertising dollar spent | Net income per marketing dollar spent |
| How it’s calculated | Total revenue from an ad campaign divided by cost of media placement | Net income (revenue less expenses) divided by marketing expenses |
| How revenue is considered | Uses the total revenue generated by the ad campaign | Uses the amount of revenue after marketing expenses and other costs are deducted |
| Types of expenses considered | Uses cost of media placement only | Uses cost of media placement and other marketing expenses such as labor, agency fees, platform subscriptions, and technology costs |
| What it tells you | How much your campaign generated compared to the amount paid for placing the campaign | How much your campaign generated as profit compared to the amount paid to manage, create, and run the campaign |
| How to use the insights | To evaluate the efficiency of a PPC campaign | To evaluate the profitability of your overall marketing spend |
The bottom line? ROAS is used to measure whether you make more money than you spent placing the ad (and how much more). ROI indicates overall profitability once you’ve paid for your marketing costs.
Example of ROAS vs ROI
Let’s say it cost $15,000 to run a paid social media campaign that generates $75,000 in sales. You can report to your client that the return on ad spend (revenue divided by ad spend) is $5 for every $1 spent, or a return of 500 percent.
However, you incurred expenses beyond the money paid to place the advertisements. It cost an additional $15,000 in labor and production to produce the slick video that captured your audience's attention, as well as design a high-converting landing page. Now your return on investment ($75,000 in revenue less $30,000 in expenses divided by $30,000 in expenses) is $1.50 for every $1 spent, or 150 percent. You’re still making more than you spent, but the profitability of the promotion as shown by ROI vs ROAS is much more modest.
Use cases for ROAS
Return on ad spend compares the revenue generated from a PPC promotion to the amount spent to place the ads on platforms such as Google, Facebook, LinkedIn, YouTube, and Instagram. This can be useful for assessing whether the sales you generate on a particular platform make the cost of that platform worth it.
To easily calculate ROAS when using multiple platforms, use a reporting tool such as Advertising Intelligence to track spending and conversions by channel. You can customize reports and determine:
- Which platform provides the highest return per media dollar spent. Your client may decide to direct more budget to a platform because of the qualified audience it reaches, or consider another avenue if a platform is showing consistently low ROAS compared to other ones.
- Which platform may be underperforming for a particular promotion compared to past results. You may need to adjust the messaging or refine your strategy to better reach your audience.
- How well you’re maintaining ROAS, especially as you spend more money and scale your campaigns.
Other marketing considerations
One of the difficulties of measuring marketing performance is that it’s hard to pinpoint the reason for success. While return on ad spend can give you an immediate measure of how well your campaign is reaching target audiences, your success can also be due to consumer confidence in your brand that your marketing has built up over time. It could also be because of the relationships you've established with followers in social media through your engagement efforts.
Efforts to improve search engine rankings, for example, may help to build awareness of your client’s brand, making conversions easier. Or, the time you've invested in building online reviews may be motivating consumers to take the final step and make a purchase. It’s always useful to help your clients understand that key tactics such as social media marketing or local SEO can support PPC and help boost performance further.
Use cases for ROI
Return on investment compares the net income generated from a campaign to total marketing expenditure, giving you a broader measure of efficiency. Considering more than media placement costs helps you assess the profitability of a campaign, as you’ll also pay for labor (writers, designers, programmers, videographers), technology (keyword tools, PPC management software, platform subscriptions), and management (agencies or contractors).
ROI is useful for assessing the impact of advertising efforts on a company’s growth, including:
- Whether the marketing funds required to generate sales are being used efficiently
- Whether overall expenses are too high for the amount of profit generated
If a company’s return on investment is consistently low, your client may decide to streamline their expenditures to generate better profitability. It may be more cost-effective, for example, for them to choose an agency that bundles PPC and SEO rather than using separate providers.
ROAS vs. ROI: Which metric is better for your clients?
Both ROAS and ROI are valid metrics for gauging performance based on the amount spent. But which should you use when reporting to your client?
Well, it depends on your client’s goals. Use return on ad spend to look at the immediate impact of a campaign in terms of how well it’s reaching and converting customers and whether a channel is performing well. Conversely, return on investment tells you more about how the overall costs of implementing PPC as a marketing channel are impacting a company’s ability to turn a profit and grow. Along with metrics such as impressions and clicks, both ROI and ROAS can be used to identify strengths and weaknesses in a client’s marketing efforts, so you can work on improving both over time.
Factors to consider when choosing between return on ad spend vs. ROI
Although reporting comes at the end of a promotion, it’s important that it’s not an afterthought. Plan ahead of time and choose the metrics that provide the most meaningful insight to your clients to help guide their business growth.
Clients expect concrete evidence that their carefully allocated marketing budget is making a difference to their bottom line. Consider some of the below factors when determining your analytics approach to ensure you’re collecting the right data before the campaign launches. If you don’t have the staff resources to manage this process, white-label PPC can help you expertly fulfill your clients’ digital ad and reporting needs.
Client objectives
Start by asking your client what outcome they want to see from their campaign and how it fits into their broader digital marketing planning. Then, match the metrics to their goals and determine whether return on ad spend or return on investment provides the most helpful data for meeting their objectives.
A startup that’s just starting to build an audience may concentrate on budget-friendly marketing tactics and using pay-per-click to drive traffic to their landing pages to accelerate conversions. In this case, ROAS can pinpoint which platforms are providing the best results for their budget so they can focus their spending.
A company interested in a steady pace of growth may want to build a long-term marketing strategy which may make ROI—which considers marketing costs—a more relevant measurement.
Campaign focus
Once you’ve determined a client’s overall goals, look at the complexity of the ads you’re running. Use the metric that’s going to help the client evaluate success based on the campaign scope.
Maybe your agency is helping the client to raise awareness of their latest product, launching a broad-reaching promotion on multiple platforms and with new creatives. Conversely, you might be placing a tried-and-true retargeting ad that’s consistently demonstrated success at converting users.
Return on ad spend can be a helpful metric for tracking the efficiency of the promotion itself, assessing how the different platforms and components are working so you can decide where to increase ad spend. Or, your client may be more interested in return on investment and whether the strategy is profitable after all costs have been deducted.
Cost structure
Cost is another factor to consider when deciding between ROAS and ROI. The number of expenditures associated with a campaign typically increases with scope and complexity.
If you’re managing Google Ads for a client, and are using a text-based ad to drive traffic to an existing product page, your costs are likely limited to the actual media placement spend. In this case, return on ad spend may be enough to tell you if you’re generating a reasonable return.
However, if you’re incurring graphic design, copywriting, and website design costs to create a landing page, or have production costs for a YouTube commercial, you’ll want to consider those expenditures on top of your media placement expenses. In this situation, return on investment is a useful metric as it takes into account the total costs required to execute the strategy, impacting profitability.
Client preference
Don’t forget to consult your clients when building analytics into your PPC campaign. While your clients are relying on you for your recommendations and expertise in providing PPC management, the growth of your agency relies on their satisfaction with your services.
Ask your clients what metrics fit best into their decision-making processes or support their business objectives. They may need certain data for reporting based on their industry vertical, or have internal reporting requirements for justifying their budget and activities to executives.
Some clients may also have a specific formula for calculating ROI, such as deducting the cost of producing the goods from the revenue to more clearly get a picture of profitability. Just make sure any calculations you provide are consistent so that you can help them accurately compare performance over time.
Measuring ad performance with both ROAS and ROI
So far we’ve been discussing ROAS and ROI as separate measurements, but you don’t have to choose between one or the other. They can be used together to provide a well-rounded view of the impact of a strategy and how well your marketing efforts are balancing revenue and expenditure.
Almost all clients will be interested in ROAS. Return on ad spend gives you a look at the immediate impact of an ad and can be easily calculated with basic data: value of conversions and the amount spent for media placement.
However, clients typically have expenditures beyond the ad spend, so many will also find ROI useful for an overall look at the effects of their marketing dollars. You’ll likely require additional data from the client to help them calculate ROI unless you’re delivering PPC with other services and have access to all of their marketing expenses.
Providing meaningful data
In addition to ROAS and ROI, you can report on metrics such as impressions and cost-per-click to help businesses assess the health of their marketing strategies and ensure their budgets are spent wisely for the best possible outcomes. Because there are so many elements involved in building an online presence, additional data points give context to performance and provide clients the ability to look at a strategy on a granular level.
Be careful not to inundate your client with data that doesn’t align with their objectives—more statistics aren’t always better. Be selective and choose the ones that provide relevant insight and can help fine-tune their efforts to reach their target audience and inspire them to convert.
You can also contextualize the metrics in terms of the campaign’s goals. For example, if you’re targeting customers at the top of the funnel to build awareness, you won’t have as many conversions and a lower ROAS and ROI than if you’re trying to reach those that are closer to the decision-making stage.
Frequently asked questions
Can ROAS and ROI be used together to measure advertising performance?
Although there’s a difference between ROAS and ROI and what they measure, they can be used together to provide a comprehensive picture of how a company’s marketing efforts are paying off. An ad campaign might be generating a high ROAS, for example, but if there are significant costs beyond what you’re paying for clicks, profitability will be impacted. It takes a metric such as ROI to provide context and insight into the broader efficiency of a marketing campaign.
What are some common mistakes when interpreting ROAS and ROI data?
Use the metrics to make informed decisions over time. First, if your initial results are less than stellar it’s not necessarily a sign to give up on a strategy or reduce spending that can interrupt potential growth—instead, use the data to adjust tactics to improve upon the results. Secondly, ROI and ROAS aren’t the sole signs of success, as benefits such as improved brand awareness can lead to conversions long after a PPC campaign has wrapped up. Finally, it takes time for marketing to build traction, and you may have to invest more in your efforts before you see benefits accrue and an improved return on ad spend and return on investment.
