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Calculating Advertising ROI – Know Your ROAS from a Hole in the Ground

Don Knotts and Jim Nabors from Andy Griffith Show looking confused - How Clients may react to how you calculate Advertising ROI
Did he say ROAS?

You may be confusing your potential clients with how your website talks about calculating advertising ROI (Return on Investment).

Worse, you may be losing credibility and prospects who know better, thinking you are intentionally misleading them.

Here is the question you need to ask:

Is your calculation about Profitability or is it about Growing Revenue?

Calculating Advertising ROI is about PROFIT

Advertising ROI is a tool to help your client understand the bottom-line contribution of advertising.

Yet, if you quickly scan the articles from a Google search, you may well find a confusing mess.

You will often find marketers and agencies talk of ROI in terms of Revenue.

Some will even go so far as to pronounce “rules of thumb”, such as

“A good marketing ROI is 5:1”. – 🙋 Really?

Not to pick on this guy – He’s just mixing up the terminology. There are others that may reach the first page of search results, and some are much more misleading.

Wrong! Here are some that are right.

Graphic - FAIL - Attention to Detail - Many marketers and agencies either mix up the terminology or use revenue instead of profit when calculating Advertising ROI
Wrong!

Advertising ROI is about PROFIT – the money your client will have pocketed from their investment in your advertising campaign.

Your formula for calculating advertising return on investment should be:

Advertising ROI = (PROFIT Earned from New Sales – Cost of Advertising)

divided by

Cost of Advertising

Where:

PROFIT Earned from New Sales = The incremental increase in profit from new sales due to Advertising

Cost of Advertising = The total cost of (investment in) running the Advertising Campaign

Handy ROI Calculator – Here

If your client were to achieve that 5:1 ratio suggested above, how would you advise your client?

Should they invest more in advertising based on those numbers? Invest less?

Example – Why Profit is Key:

Let’s work the numbers. Say you spent $1000 in advertising. At 5:1, ideally this results in news sales of $5000. Hurrah! 👍😊

But, if your profit margin is 10%, those new sales would yield $500 profit. You’d be at a $500 loss ($500 profit less $1000 in advertising)! Oh no! 😱

Without profit in the picture, you and your clients have no basis to make a reliable investment decision or judge the fundamental success or failure of their investment.

Return on Advertising Spend (ROAS) is about REVENUE

The difference between calculating Advertising ROI and ROAS is Profit vs Revenue.

Your formula for calculating ROAS is:

ROAS = Incremental REVENUE from New Sales

divided by

Cost of Advertising

Remember the 5:1 rule of thumb? Yep, he was saying ROI, but talking about ROAS.

Don Knotts from Andy Griffith Show, fumbling with loading bullets into his gun.  Some marketers may just not know that they are referring to ROAS rather than calculating Advertising ROI
Where does Revenue go again?

You can use this simple ratio to help you determine which channels, or advertising tactics for a campaign are most effective – with optimizing for growth.

But, alone, it cannot help you decide if advertising is worth the investment.

Which Measure to Use?

Short Answer: Both!👍👍

Andy Griffith is holding a ruler at shoulder height while Don Knotts is pointing.  Should you use Advertising ROI or ROAS as a measure?
Are you pointing to the correct thing?

Your client will love that you are feeding their bottom-line. For that you need to calculate your Advertising ROI.

But, you also need to know which ads and which channels are performing well for your client’s money. For that you need to know your ROAS by each.

Be Clear – Don’t Confuse

Boy with Top Hat conjuring from a crystal ball.  It is not magic.  Calculating Advertising ROI correctly and correctly referring to ROAS will build your credibility with your clients.
It’s not Magic

You could argue that with both these calculations there are issues of timing and complexity with attribution, especially with larger clients.

True, but working around those complications and considerations are the subject for another article, and not a reason to obscure what these two measurements are and how they are used.

In any case, it comes down to this:

Don’t confuse your clients by mixing Advertising ROI and ROAS

And, be mindful of the differences when you see a website or someone presents to you a calculation of Advertising ROI based on Revenue.

Are they confused, or are they misleading?

You decide, now that you know.