The Merits of ROI and ROAS
Defining ROI and ROAS
Return on investment (ROI) optimizes to a strategy while return on advertising spending (ROAS) optimizes to a tactic, yet some marketers use these terms interchangeably. ROI measures the profit generated by ads relative to the cost of those ads. It’s a business-centric metric that is most effective at measuring how ads contribute to an organization’s bottom line.
ROI = (profits – costs) x 100 / costs
In contrast, ROAS measures gross revenue generated for every dollar spent on advertising. It is an advertiser-centric metric that gauges the effectiveness of online advertising campaigns.
ROAS = revenue from ad campaign / cost of ad campaign
With ROAS, marketing is considered a necessary cost of doing business, whereas, with ROI, marketing is an investment to grow a business’s profits incrementally. While using both metrics in tandem is useful, the pendulum is swinging back from the widespread use of the ROAS-focused model in digital advertising to a more rigorous ROI-focused model.
Cost Versus Investment
Tracking to ROAS can increase advertising expenses across all channels , especially if marketers treat advertising as a cost while seeking additional market share. The focus on an expected profit margin would keep bids and spending in check. Ad vendors push this metric, but it can lead to advertisers feeling a need to spend budget without truly understanding the incrementality of each additional dollar of media spend. Much of our advertising is multitouch. ROAS does not measure the true impact of one channel on another, such as emails’ impact on display, or offer an understanding of the incrementality of ad-dollar investment, which the ROI metric provides.
Today, consumers interact with ads and content across multiple channels and devices before converting. This changes the dynamic for media agencies and ad vendors, forcing them to modify their business models and pricing to become focused on driving business performance, not just advertising performance. As a result, advertising vendors must evolve into stewards of advertisers’ ad dollars, with a focus on measuring how advertising impacts clients’ business through ROI, rather than optimizing to ROAS, their own advertising-based metric.
How Air Age Media and the ADP Can Help
The audience development platform (ADP) is a comprehensive community ecosystem of highly engaged enthusiasts ingesting content simultaneously across our digital and other channels. Air Age Media as a steward of your ad dollars. We create custom ad campaigns to meet any budget designed to leverage the ADP’s strategic, multichannel approach to consumers, thereby maximizing your ROI.
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Thanks, great article.