TL;DR: Maximizing return on investment (ROI) and return on advertising spend (ROAS) is essential for businesses, but having a clear understanding of the differences between the two metrics is crucial for making informed decisions regarding marketing strategies. In this post, we'll explore the differences between ROI and ROAS, when to use each metric, and some caveats to keep in mind.

What are the differences between ROI & ROAS?

Measuring the effectiveness of marketing campaigns is crucial for businesses looking to maximize their return on investment. Two common metrics used for this purpose are Return on Investment (ROI) and Return on Advertising Spend (ROAS). While both metrics measure the performance of marketing campaigns, there are some key differences between them that businesses need to understand in order to make informed decisions.

ROI is a financial metric that measures the profitability of an investment. It is calculated by subtracting the cost of the investment from the revenue generated and dividing the result by the cost of the investment. The resulting percentage value indicates whether the investment is profitable or not. A positive ROI indicates that the investment is profitable, while a negative ROI indicates that the investment is not profitable.

‍

On the other hand, ROAS is a marketing metric that measures the revenue generated from advertising relative to the cost of advertising. It is calculated by dividing the revenue generated by advertising by the cost of advertising. The resulting ratio indicates how much revenue is generated for every dollar spent on advertising.

‍

One of the key differences between ROI and ROAS is the scope of their measurement. ROI measures the overall performance of an investment, while ROAS measures the performance of advertising specifically. This means that ROI takes into account all factors that contribute to the return on investment, while ROAS focuses solely on the revenue generated from advertising.

Another difference between ROI and ROAS is their interpretation. ROI provides a percentage value that indicates whether the investment is profitable or not. This allows businesses to compare the profitability of different investments and make informed decisions about where to allocate their resources. ROAS, on the other hand, provides a ratio that indicates how much revenue is generated for every dollar spent on advertising. This metric is useful for businesses looking to optimize their advertising spend and maximize their revenue.

When should I use what of them?

Choosing between ROI and ROAS depends on the business objective and the context of the marketing campaign. Here are some scenarios where one metric might be more appropriate than the other:

Use ROI when:

1. When evaluating the profitability of a marketing campaign: ROI is the more appropriate metric. This is because ROI measures the overall profitability of an investment, including all factors that contribute to the return. If a business is looking to determine whether a marketing campaign is generating a positive or negative return, ROI is the best metric to use.
2. When comparing the performance of different marketing channels: ROI is the more appropriate metric. This is because ROI takes into account all factors that contribute to the return on investment, including the cost of the marketing channel. By comparing the ROI of different marketing channels, businesses can determine which channels are generating the most overall profit
3. You want to measure the overall profitability of an investment, including all factors that contribute to the return.

Use ROAS when:

1. When optimizing advertising spend: ROAS is the more appropriate metric. This is because ROAS measures the revenue generated from advertising relative to the cost of advertising. If a business is looking to optimize their advertising spend and maximize their revenue, ROAS is the best metric to use. By comparing the ROAS of different marketing campaigns, businesses can determine which campaigns are generating the most revenue per dollar spent on advertising
2. You want to measure the effectiveness of advertising specifically.
3. You want to compare the performance of different advertising campaigns to decide where to allocate resources.

In general, ROI is a more comprehensive metric that takes into account all factors that contribute to the return on investment. It is useful for evaluating long-term investments and comparing the profitability of different investments. ROAS, on the other hand, is a more focused metric that measures the effectiveness of advertising specifically. It is useful for optimizing advertising spend and evaluating short-term advertising campaigns.

Ultimately, the choice between ROI and ROAS depends on your specific goals and the type of investment you are measuring. By understanding the differences between these two metrics and when to use them, you can make more informed decisions about your marketing strategies and optimize your return on investment.

There are few caveats to keep in mind:

1. Accuracy depends on data quality: The accuracy of ROI and ROAS calculations depends on the accuracy of the data used to calculate them. It's important to ensure that your data is accurate and complete to get reliable results.
2. Attribution can be challenging: Attribution refers to the process of assigning credit to different marketing channels for generating revenue. It can be challenging to accurately attribute revenue to specific marketing channels, which can impact the accuracy of ROI and ROAS calculations.
3. Cost accuracy: Accurately calculating costs can also be a challenge, especially in situations where indirect costs need to be factored in. This can affect the accuracy of both ROI and ROAS calculations.
4. Context: ROI and ROAS should not be used as the sole metrics for evaluating marketing campaigns. Other metrics, such as customer lifetime value (LTV) and customer acquisition cost (CAC), should also be considered to provide a more complete picture of performance.
5. Different industries have different benchmarks: The benchmark for a good ROI or ROAS can vary depending on the industry and the specific business. It's important to know the benchmarks for your industry and set realistic goals based on your specific business.

Why understanding ROAS on the entire population is crucial?

Understanding ROAS on the entire population is crucial because it provides a more complete picture of the effectiveness of your advertising efforts, allows you to identify trends and patterns in your performance, and allows you to benchmark your performance against industry norms. By taking these factors into account, you can optimize your advertising strategies and improve your return on investment..

If you only measure ROAS on a small segment of your population, you may miss out on important insights into how effective your advertising is across different customer segments. For example, you may find that your advertising is very effective at generating revenue from a particular demographic, but not from others. Without measuring ROAS on the entire population, you may miss this important insight and continue to allocate resources inefficiently.

How Kahoona get involved?

Kahoona’s solutions allow digital business to get insights on the entire population without the necessity of 3rd Party Data. With our 1st Party Data activation platform we provide solution for an identity-less digital ecosystem.

Most of the e-commerce companies relies on personal identifier based on users sign-in or converted users for there Data collection while Kahoona make deep behavioral data enrichment that provide more complete picture of the entire audience.

Kahoona converts unknown users to actionable profiles with AI-Driven segmentation and deep behavioral data, and help businesses receive more accurate and effective data for ROAS, ROI, CAC, LTV etc. - Book a demo with us!

‍