ROI vs ROAS: Which KPI should you be using?
Running paid advertising campaigns is a great way for companies to quickly drum up interest in their brand and generate high-quality traffic, leads, sales, and phone calls for their business. However, you have to make sure that they’re moving the needle and not eating your budget. The last thing you want is to spend thousands of dollars each month and not generate any revenue.
There are two main KPIs to measure your PPC campaigns’ performance, ROI and ROAS. But when and how do you use these metrics? I put together a quick guide to help you learn the difference between ROI vs ROAS.
What are ROI and ROAS?
While these two metrics are quite similar to one another, there is a major distinction that separates them and changes when and how you’ll use them to help you make better decisions about your marketing efforts.
Return on Investment (ROI) is a KPI that calculates the profit that’s generated for every dollar you spend on advertising. Which is essentially just a ratio between your net profits and total cost. A campaign’s ROI will give you a clearer picture of its profitability and its impact on your company’s bottom line.
Return on Ad Spend (ROAS) is a KPI that measures how much revenue your paid marketing campaigns generate in relation to how much you spend on them. Think of it as a performance multiplier. A campaign’s ROAS gives you insight into its overall performance so you can do a quick comparative analysis against other campaigns or other periods for the same campaign to see which one performs better.
Knowing your campaigns’ ROAS is a phenomenal way to quickly see how they’re performing. Most PPC platforms like Google Ads and Facebook Ads have built-in ways to calculate this KPI, but if you ever need to calculate ROAS on your own, you can use the equation below.
ROAS, as a metric, is only concerned with the ratio between the revenue generated and the cost of running the ads. It’s just a benchmark for the effectiveness of a paid marketing campaign.
For example, let’s say that you’re working for a sporting goods store and you’re tasked with running a campaign on Google Ads to sell a new line of tents. You spend $20,000 running the ads and generate $65,000 in revenue. Plugging those figures into your formula would give you a ROAS of 3.25x.
- Total PPC Cost: $20,000
- Total PPC Revenue: $65,000
- ROAS = 3.25x
Not too bad, right? You generated $3.25 for every $1 you spent on advertising. Pretty good, right?
The ROAS and the ROI formulas are very similar. However, you’ll need to apply your profit margin to the Total PPC Revenue figure to figure out your ROI. This would change the formula to look like the one below because we’re only concerned about how much profit we generate per dollar spent.
Depending on what your job is at your company, you may not have access to the GPM so an average profit margin will do just fine here too.
Using the same example as above, you spent $20,000 running the ads and generated $65,000 in revenue. Assuming a 20% margin, we’d have a formula of ((($65,000 x 20%) – $20,000) / $20,000) x 100 = -35% which is a deeply negative ROI. That’s because even though we generated $65,000 in revenue, only $13,000 of it was profit. ($65,000 x 20% = $13,000)
For this example campaign, you basically spent $20,000 to make $13,000 after all was said and done.
- Total PPC Cost: $20,000
- Total PPC Revenue: $65,000
- Profit Margin: 20%
- Total Profit: $-7,000
- ROI: -35%
That’s a huge difference compared to the ROAS and it makes running this campaign sustainable. For it to just break even, it would need at least a 5x ROAS or $100,000 in revenue generated. And breaking even probably isn’t good enough to be considered a “success”. You’d most likely need to have a +50% ROI or more (at least $150,000 revenue).
ROI vs ROAS: When should you use these metrics?
ROAS has grown a lot more popular in recent years and it’s found its way onto nearly every marketing report under the sun. You need to be very careful when, where, and how you use this KPI.
If the above example didn’t make it clear enough, ROAS is misleading, and here’s why.
By itself, ROAS is not a great metric. It uses two incomplete, surface-level KPIs to make yet another incomplete, surface-level KPI. Using ROAS to judge your PPC’s profitability is like trying to figure out where a piece of a puzzle goes without looking at the picture on the box. You just don’t have enough information to make a real decision.
I’ve seen so many businesses point at their 2, 3, or 4x ROAS and ask why they aren’t making any money when, depending on their margins, they need a 6 or 7x ROAS to turn a profit.
ROAS is a pulse check metric that tells you how well a paid campaign is performing. That’s it. The only time it should be used is for quick, high-level reporting and only with the expressed knowledge of what the multiplier needs to be to turn a profit.
Outside of that, you need to put in the work to build out an actual PPC ROI formula for your business and have it close at hand. This will tell you whether or not your paid marketing campaigns are moving the needle or just eating your budget. I’m a big fan of building out marketing dashboards using Klipfolio or Google Data Studio so these important KPIs are always accessible.
Depending on how and when you use them, ROI and ROAS can give you fantastic insights into the performance of your paid marketing campaigns. You can also use these KPIs as a way to better optimize your campaigns and measure the change in performance.
If you need help with measuring the effectiveness of your PPC marketing, be sure to get in touch with us! Our team of experienced digital marketing professionals has helped hundreds of businesses improve their paid advertising channels to generate more qualified traffic, leads, and revenue and we can do the same for you!