Roman Garbar
July 27, 2017
When you measure your ad campaigns, you’re going to use either ROI (Return on Investment) or ROAS (Return on Ad Spend). But these measurements aren’t fully interchangeable: each has its strategic uses.
A few years ago, most companies wouldn’t have stopped to consider whether switching to a subtly different measurement might be worthwhile. But today, ad campaigns are often balanced on a razor edge of profitability. Swapping ROI for ROAS, or vice versa, may save on manual effort and help you make the right decisions faster.
Return On Investment
ROI produces a percentage measurement. Your equation should look like this:
% ROI = (revenue – ad spend) / ad spend
The important takeaway: ROI can come up with a negative number — even if the ad campaign is meeting expectations!
Return On Advertising Spend
ROAS, in contrast to ROI, produces a dollar number.
$ ROAS = revenue / ad spend
The important takeaway: ROAS tells you how many dollars (or cents) you earn back per $1 spent on marketing. It can be under $1 (meaning you lost money, if you’re only considering the value of the acquired user), but not a negative number.
When to Use ROAS or ROI
Business priorities make the case for one or the other metric. Simply put, ROAS is more typically used when optimizing for growth, while ROI is used when optimizing for profit. Consider the following problem:
Revenue from acquired users: $9
Advertising costs: $10
ROI = (9 – 10) / 10 = -10%
ROAS = 9 / 10 = 90%
For a newly released game that’s optimizing for user growth, an ad campaign like this may be achieving its goal of growing the userbase. Thus, the $0.90 figure earned back on every $1 the company is spending on ads looks worthwhile: it’s clear to see that the campaign is making a loss of $0.10 in its quest to bulk up the app.
The negative ROI looks like an issue if you’re optimizing for growth — it’s not, but negatives don’t go over well in board meetings. More to the point, ROI is showing that you’re not (yet) making a profit, although the full story isn’t clear yet.
On the other hand, ROI has stood the test of time in established businesses because those are the companies that can eventually shift their focus to profits. For instance, most of the apps on the top grossing chart are able to earn a clear profit from each user acquired via ads — and they need to, since many are getting more of their users from ads alone. In this case, tracking the percent ROI is better for detecting changes in performance.
Of course, ROI and ROAS both depend heavily on what may be the most important measurement of all: lifetime value. For our primers, check out LTV 101 and LTV 201 articles.
