ROI vs ROAS
Updated: Nov 20, 2019
Wondering how to measure your marketing performance? What to consider? How to optimize campaigns? SDM team leader Yogev Hevron has the answers for you.
ROI vs ROAS
As a mobile agency we always seek for better return on client’s investment. Not only this, we also need to improve this ratio over time. We need to understand what we are doing good and what we need to improve in each of our campaigns, conservation and improvement.
A quantitative observation is a must and for that we have two different metrics we use in order to measure the paid (none organic) success of our advertising work. ROI = Return On Investment ROAS = Return On Ad Spend
ROI - (Revenue - Cost)/ Cost By looking at the equation we can understand what to include in the cost parameter, workers, software, creatives and all direct cost including media cost (don’t take office rent for example) the output is a percentage result; a positive result means you are at a profitable point but be aware that a negative result means this campaign need more time for users to deposit/purchase. This metric is looking at a business view.
ROAS - revenue from ad campaign / cost of ad campaign This metric allows us to understand if we are profitable on a certain ad/ads group/campaign (match the revenue vs cost so you will compare apples to apples) this time we don’t take into consideration the cost of anything buy media cost and we don’t count all revenue which is not from the ad/ads/campaign we want to measure. The outcome is at least zero (in case of no revenue) but never negative.
Examples: A. Revenue is 1,000$, media cost is 600$, software is 300$, workers are 500$ The ROI is (1000-1400)/1400= -0.28 (you covered 72% of the investment) The ROAS is 1000/600= 1.66 (you covered all ad cost and profit extra 66%) focus to improve workers or software cost.
B. Revenue is 100$, media cost is 600$, software is 300$, workers are 500$ ROI is (100-1400)/1400= -0.92 (you covered 7.2% of the investment) ROAS is 100/500= 0.2 (you covered 20% of ad cost)
The main key is to make sure the time frame of the data is relevant, as we don’t expect to see a positive ROAS after a day. A user takes time to purchase and deposit money, each app and user behaves differently. Another point is when the user first open the app, we are measuring the revenue based on users from the last 30 days, meaning we don’t count all revenue of users older than this which purchase in the last 30 days. Or, are we looking at the revenue in last 30 days, don’t mind when the user first use our app (Life Time Value). Mind the difference. Its also very important to gather data on how long in average It takes a user to reach a profitable point. Make sure you and your partners see the metrics the same way, so you will understand each other at the analyzing results stage. The main differences between the two metrics are about what we can improve with each metric, with ROI we can’t improve a single ad while with ROAS we can’t improve the worker cost or software cost. Looking at both metrics is the smartest way, this way you can understand if the failure is in the campaign/ads set/ad OR if the failure is in software which is not effective. When to use ROI or ROAS: Generally speaking we'll use ROAS for ad/ads set/campaign optimization and ROI for a business optimization. Use it wisely!
Yogev Hevron 27 Feb. 2019