ROI and ROAS
Advertising in general, especially in search engine marketing (SEA) and paid social media (Paid Social), is a must to gain new leads and customers online. In this context, it is important to regularly check the advertising campaigns for their efficiency and to optimize them. For this purpose, two key figures are particularly relevant in the field of performance marketing that are also relevant for ongoing consultants that can be part of a case interview.
ROI (Return on Investments)
The ROI value indicates how much profit an advertising campaign has generated in relation to the capital invested. This value therefore indicates the extent to which the campaign was profitable.
The formula is:
(profit/sales) x (sales/total capital) x 100.
A company places Google advertising for 10,000 euros and subsequently takes in 15,000 euros. The profit is therefore 5,000 euros. This results in the following ROI:
- 10,000 euros total capital
- 15.000 Euro turnover
- 5.000 Euro profit
(5,000/15,000) x (15,000/10,000) x 100 = 50
The ROI can therefore be set at 50%. It depends on the industry which ROI value is considered profitable. In principle, the value should be at least 10, and is considered ideal from 15 to 25 percent.
ROAS (Return on advertising spend)
With ROAS, it is possible to calculate even more precisely what profit is achieved per advertisement. This makes it a subsection of ROI and an important indicator, especially in digital marketing and e-commerce. Since various bidding strategies are possible with Google Ads, for example, it is important to evaluate which strategy is most promising for which advertising campaign.
The formula is:
Revenue) / Advertising spend x 100
A company makes 100,000 euros in sales in an online store and the expenditure on advertising is 10,000 euros.
- 100.000 Euro turnover
- 10.000 Euro advertising expenses
100.000/ 10.000 = 10
The ROAS is 10:1, so the higher the value achieved, the more profit is generated by an ad.
There are also individual values for ROAS that are considered profitable. Basically, it should be above 100%, otherwise the campaign will cost more than it brings in. A ratio of 4:1 is set as a benchmark, i.e. achieving four euros in profit for one euro invested.
Areas of Application
Online advertising and marketing:
- Digital advertising campaigns: companies use ROAS and ROI to measure and optimize the effectiveness of their online advertising and marketing activities.
- Product Sales: E-commerce companies use ROAS and ROI to evaluate the success of their online sales strategies and activities, including pay-per-click advertising, social media marketing, and email marketing.
- Stocks and Bonds: Investors use ROI to calculate and compare the return on their investments in stocks, bonds, and other financial instruments.
- Real Estate Investments: Real estate investors use ROI to evaluate the profitability of real estate investments, including rental properties and real estate development.
Business Planning and Development:
- Enterprise Projects: Corporations use ROI to analyze and plan the profitability of projects, initiatives, and investments.
Marketing Campaign Evaluation:
- Campaign Performance: marketers use ROAS to evaluate the performance of individual marketing campaigns or channels such as Google Ads, Facebook Ads, and email marketing.
- Sales Strategies: Companies use ROI to monitor and adjust the effectiveness of their sales strategies and efforts.
- New Product Launches: Companies evaluate ROI to determine the success of product development projects and associated investments.
Customer relationship management (CRM):
- Customer acquisition and retention: companies use ROAS and ROI to measure the value of their customer acquisition and retention strategies.
Education and Training:
- Continuing Education: Educational institutions and businesses use ROI to evaluate the effectiveness of employee training and development programs.
- Fundraising: Nonprofits use ROI to analyze the effectiveness of their fundraising activities and ensure that donations are being used effectively.
Freelancers and self-employed professionals:
- Project work: self-employed and freelancers use ROI to determine the profitability of their projects and services.
Both ROI and ROAS have their limitations, however, as purchasing decisions cannot always be attributed solely to an advertising campaign (see also Correlation and Causality). In addition, the two values do not reflect the point in the customer journey at which the purchase decision was made.
In addition, at the beginning of a campaign for a new product, the goal may not be to achieve high sales figures immediately, but to generate attention or a positive brand image. In this case, the values are not meaningful.
To obtain a particularly reliable statement, the values should therefore be collected regularly and the trend observed.