How to calculate ROAS and ROI and common mistakes

Trying to understand the value in marketing spends is important for businesses at all stages of growth, or lifestage. For businesses running campaigns online, through digital marketing is easier as attribution is possible, as flawed as it might be, to different aspects of the marketing cycle. 

What is ROAS? 

ROAS or return on ad spends is the total revenue generated by ads divided by the amount of spends on the campaign. 

In simpler terms: 

ROAS = Revenue generated from ad campaigns

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Advertising budget for the campaign

Now, if you define a campaign as a single unit you set up on any ad platform or something seasonal such as festive, or topical campaign is up to each business and its marketing team. That’s typically how you’d define ROAS. 

ROI or return on investment: 

This one is defined taking into account a number of metrics which each business should evaluate for itself. 

1. Amount of discount if applied in acquiring the customer 

2. How many customers did you acquire in absolute terms

3. How many have been retained after the campaign is completed? 

4. Did they purchase the same average transaction value, or more number of services or lower? 

5. Are these users buying other products or the same ones which were advertised

Essentially, ROI continues to evaluate the value of a customer well after the campaign has finished, and takes into account the discounts, or margins lost to acquire the customer, and continued value the business seeks to gain. 

Which metric is better or important in business: ROAS or ROI

Both metrics are equally important for a business. However, if the short term ROAS looks strong and the customer is not repeating, or adding any additional value, any business should consider the impact of the campaign, or the source on the bottom line of the business. 

Often businesses get swayed with the idea of 3x-4x ROAS when hiring marketing agencies. The truth is getting a sustained 3-6x ROAS is not feasible for every single business. There are a number of factors here; but among the most important ones are: if you’re consistently spending to acquire customers, and not receiving any customers organically, you will eventually fail to acquire new customers without any spends. That also is an indicator on the quality of the product, or services being sold. That’s the unfortunate truth. Staying invested in marketing is necessary; equally building a brand takes time.