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ROI vs. ROAS: Differences and Which You Should Use

Many people make the mistake of assuming that they should use either ROI or ROAS to calculate the viability of their business. The bottom line is that together these e-commerce metrics unlock different insights into your business as a whole and will allow you to set benchmarks to boost your company's performance. They can tell you if you have effective or disruptive advertising that's optimizing your ROAS, if your marketing budget is experiencing a bleed, or when you reach your break-even point. To help you understand the difference between ROI and ROAS, this article explains what they are, how to calculate them, and which you should use for different situations. What Is ROI? Return on investment (ROI) measures the net profit you make on an investment, taking the original cost of the investment into account. Calculating ROI With an Example You can use the following formula to calculate ROI to see if your business is a good investment: ROI = (net profit / net spend) x 100 Let's look at an example: Marvelous Meats makes a net profit of $10,000 a month. Their net spend is $6,000. Therefore: ROI = (10,000 / 6,000) x 100 =166.66666 ~ 167% Let's look at another example: Ben's Bakery makes a net profit of $10,000 a month, but their net spend is $9,000. Therefore: ROI = (10,000 / 9,000) x 100 =111.1111 ~ 110% These examples tell us that Marvelous Meats is more profitable and a better business opportunity for a prospective small business buyer. What Is ROAS? Return on ad spend (ROAS) measures how effective your online advertising campaigns are. In other words, ROAS will tell you how much your business earns for each dollar you spend on advertising. Calculating ROAS With an Example The formula for calculating ROAS is: ROAS = (revenue generated from adverts / advertising spend) x 100 Let's look at the same examples: Marvelous Meats generates $7,000 from their online adverts. Their online campaigns cost $2,000: ROAS = (7,000 / 2,000) x 100 = 350% Ben's Bakery generates $4,000 from its online adverts. Their online campaigns cost $3,000: ROAS = (4,000 / 3,000) x 100 = 133% These examples tell us again that Marvelous Meats has a more effective advertising campaign when compared to Ben's Bakery. ROI vs. ROAS: What Are the Differences? Here are six of the most important differences between ROI and ROAS: Purpose: ROI speaks to your company's profit and ROAS to its revenue. Profit: ROI will tell you if your company's advertising is profitable, while ROAS only considers direct spend and doesn't take other online campaign costs into account. In other words, ROAS can tell you if your adverts are generating clicks and impressions, and ultimately revenue. The type of investment: ROI will analyze the success of any investment while ROAS calculates the success of marketing and advertising campaigns.Spend: ROI looks at organizational spend, while ROAS looks at ad spend.Results: ROI tells you if your marketing and advertising campaign is profitable while ROAS will tell you if it's effective.Finances: ROI and ROAS represent a business's finances differently. ROI uses your investments to increase your profits steadily over time, while ROAS is seen by many as a necessary cost of doing business. Now that you have a good understanding of the main differences between ROI and ROAS, let's take a look at a more practical example. Example of ROI vs. ROAS Your company makes $50,000 in revenue and spends $12,000 on advertising. The cost of your equipment and employees adds up to about $40,000. ROI = (-$2 000 / $52 000) x 100 = -3.85% ROAS = ($50 000 / $12 000) x 100 = 417% The ROAS calculation may look good at first glance, but the ROI tells you a different story. These figures tell you that your business is not making money—in fact, it's running at a loss. This is why it's so important to calculate and keep up with both your ROI and your ROAS at the same time. On the other hand, these calculations could also tell you that your company is spending a lot of money on an online advertising campaign that's not effective and not optimizing ROAS. You can use ROI and ROAS to keep your finger on the pulse of your business, and as a result, see it succeed! ROI and ROAS: What Are the Similarities? ROI and ROAS are both useful metrics that business owners can use to find out if the company's money is spent optimally. Both of these metrics can also tell you how effective your marketing and advertising campaigns are or, in other words, how your marketing affects your company’s revenue. ROI vs. ROAS: Which Should You Use? If you're serious about monitoring the success of your business you should regularly calculate both your ROI and ROAS. Once calculated, the results can be included in profit reports and performance reports to provide you with an overall view of your business and allow you to make appropriate changes to your business strategy. Calculate the Break-Even Point Using ROI and ROAS You reach your break-even point in your business when you're not making money, you're also not losing money, but all your costs are covered. It calculates the minimum sales you'll need to cover all your costs. In simpler terms, you reach break-even at the point where your total costs (TC) equal your total revenues (TR): TC = TR. Calculating your break-even point is especially important in the beginning stages of building your business. Analyzing your ROI, ROAS, and break-even point will give you powerful insights into the state of your business. By making data-driven decisions, you will build a solid business from the ground up, a business that will stand the test of time.