Marketing has been viewed as an expense in the books as opposed to an investment. Return On Investment (ROI) implies the thought of doing something in the hopes of it positively impacting the company’s revenue. When we talk about ROI, I don't believe that we can associate it with marketing. Most businesses typically look at marketing as an expense. It’s a “What have you done for me lately?” profession, not a “What have you done for me (the business) over the past ten years?” profession! The only alternative to associating ROI with marketing is to look at marketing as a Return On Advertising Spend. But, you still need the tools, the knowledge, and the resources to calculate both ROI and ROAS.
What Is ROI?
ROI is the most common profitability ratio. There are several ways to determine ROI; however, the most frequently used method is to divide one’s net profit by one’s total assets. So, if your net profit is $1,000,000 and your total assets are $3,000,000, your ROI ratio would be .33 or 33 percent. Within the domain of marketing,
ROI is a measure of the profit on earning from an investment. Similar to the “return” (or profit) that you earn on your 401k, which is a percentage.
Why Is ROI Dead?
The profitability ratio is simply a general mathematical tool that is used within most business settings. Tradition does not make it accurate or contextually sound. Access to full cost or profit margin includes taxes, shipping, etc. Your marketing team cannot control it and has limited ability to influence it. Marketing has much to do with statistics the trends in human behavior. We must remember that causation is nearly always impossible; correlations are commonplace. The emphasis on ROI as an effect of some marketing tactic or, criticizing some marketing tactic for its lack of effect on ROI is most always a false conclusion.
What Is ROAS (Return On Ad Spend)?
Return On Ad Spend (ROAS) represents the ratio of dollars earned after advertising to dollars spent on the corresponding advertising. To determine an ROAS ratio, divide revenue derived from the ad source by the cost of that same ad source. Values that are less than one (1.00) indicate that less revenue is generated than is spent on the advertising. In other words: less than 100% of your expenditure was returned to you.
Why Is ROAS Alive?
Return On Ad Spend gives management, your marketing team, or your ad agency a standard metric to measure success. ROAS provides accountability to all parties and is adaptable to every marketing scenario. This is because ROAS isolates the amount of money that was spent on advertising as well as the amount of money that was gained through that particular advertising. This is a metric that applies to one advertising campaign at a time as opposed to ROI. The latter metric does not isolate any particular advertising campaign profits or expenditures in its calculation. ROAS is an effective way to measure your marketing campaigns because the expenditures from advertising tactics of the campaign are connected. Also, it aligns to common thinking of “money not in your hand is money lost.” It’s a real method of measurement that evolves with the increasing accessibility of your information.
So, What Should I Do About ROAS?
I would recommend that you assess your ability to measure ROAS. If you can’t, your ROI metrics are ineffective! Do you have access to marketing expense with and without markups? What are your fees per marketing campaign? Are you increasing revenue directly from the campaign? Do you own or have access to the metrics to calculate ROAS? Get more detailed results from a different perspective on your marketing. Evolve with the times and technology; or, your business might just become extinct!
Daniel Laws is President of DaBrian Marketing Group www.dabrianmarketing.com.