Understanding ROAS vs. ROI: Why It Matters

The ROAS vs ROI debate is eternal among marketers who are just starting out, and today we are going to settle it once and forever. 

Have you ever looked at your marketing reports and thought, “Okay, I am spending all this money on ads, but is it actually worth it?” Trust us you are not alone. In fact, many marketers struggle with the dilemma that most of their ad campaigns are unable to pull their weight.

Don’t believe us? Well, let us tell you, as per trusted sources, about 41% of the ad spend budget was wasted in 2024. (Source)

In 2024, every marketer and business owner is burning their very last brain cell wondering if their dollars are working hard enough or just taking a vacation. And if you are one of them, we have just the right metric to find out how much of your ad budget is actually working in your favor. 

Yes, we are talking about the classic ROAS vs ROI debate. The most staggering aspect of this debate is that most mediocre marketers or even tech-savvy clients fail to recognize the difference between these two. While ROAS stands for Return on Ad Spend, ROI is the acronym for Return on Investment, and a vast proportion of digital folks focus only on the ROI part. 

Fold Your Sleeves Because Things Are Going to Be Interesting! 

Now, before you roll your eyes in disbelief saying “Okay so this is just another marketing metric,” let me promise you this: once you understand the difference between these two, you can gigantically transform the way you run your marketing campaigns. 

Why? Because while one parameter tells you if your ads are bringing in revenue, the other shows you if you are actually making a profit. It’s like comparing how much pizza you can buy with a $20 bill (ROAS) versus how much fun you actually had eating it after factoring in delivery fees and a surprise tip (ROI).

So folks, grab your coffee (or tea!), and let’s break this down step-by-step. Ready? Let’s roll!

What is ROAS (Return on Advertising Spend)?

ROAS, or Return on Ad Spend, is a way to see how well your ads are doing. It tells you how much money you make for every dollar you spend on advertising. This metric helps you understand whether your advertising efforts are bringing in enough money to justify the investment, or not.

In a nutshell, a higher ROAS indicates a more effective campaign, while a lower ROAS means the ads not generating enough revenue. 

Why Should You Care About ROAS?

ROAS full form is Return on Ad spend, so it’s literally the lifeblood of your ad budget. 

Think about this: you are running a paid ad campaign on Facebook, and you want to know how well your ad is performing. But how do you do that? Well, here, the ad spend ROAS offers you a clear answer by comparing the revenue generated from the campaign to the actual amount you spent on it. 

Here’s what the ROAS formula looks like:

ROAS = Revenue from Ads / Cost of Ads

In words, you have to take the revenue generated from your ad campaign, and divide it by the cost spent on ads. 

ROAS = Revenue from Ads ÷ Cost of Ads

For example, if you spend $2,000 on a Google Ads campaign, and you generate $10,000 in sales, you can calculate ROAS like this.

ROAS= (10,000/2,000)= 5

If you have a ROAS of 5 that means, for every $1 you spent on ads, you earned $5 in revenue. Now, that’s what we call pretty neat, right? If you are wondering what is good ROAS, this is it! 

In fact, when it comes to ROAS, here’s a general benchmark that marketers use:

• ROAS of 4:1 or higher (400%), which is considered very good. This means that for every $1 spent on advertising, you will earn $4 in revenue. 
• ROAS of 3:1 (300%), is seen as a strong return in most industries. 
• ROAS of 2:1 (200%) which can still be acceptable for growth-focused or competitive markets, but leaves relatively less profit margins. 
• ROAS of 1:1 (100%) means you are breaking even. This is not at all sustainable in the long term unless there’s a strategic purpose like brand awareness. 

NOTE: A good ROAS generally depends on the industry, campaign goals, and business model, so don’t rely on a cookie-cutter approach to determine good ROAS. 

Read More: Key Metrics to Improve ROAS

What is ROI (Return on Investment)? 

While ROAS works brilliantly for measuring the success and performance of your ad campaign, ROI gives you the bigger picture. ROI stands for Return on Investment, and it measures how profitable an investment is by considering both the revenue and the costs involved, not just the money spent on ads.

Why Is ROI Crucial for Your Marketing?

The marketing ROI helps you scrutinize whether your marketing spend is truly worth it when you consider all the costs involved in running your business. In a nutshell, it’s more of a comprehensive measure that offers you insights into the net profit of your entire business operations, including your marketing investment. 

The formula to calculate ROI is:

ROI = (Net Profit / Cost of Investment) x100

So, to calculate ROI or to find out how much profit, you have made from an investment, you need to:

• Divide the net profit by cost of the investment
• Multiply the result by 100 to express it as a percentage. 

If we have to break this down with an example, it would be like this-

• Suppose, the revenue from the campaign: is $20,000
• The total costs (including ad spend, overhead, and product costs) are $15,000
• Net profit= $20,000-  $15,000 = $5,000
• ROI = ($5,000 / $15,000) * 100 = 33.33%

So, you are getting an ROI of 33.33%, which means that for every $1 invested, you are making a 33.33% profit. In fact, here’s an example of one client achieving a massive 35% Lead Surge and a 300% ROI boost. 

ROAS vs. ROI: Key Differences You Need to Know

People who don’t understand the revenue vs profit cycle, often use the terms ROI and ROAS interchangeably, but these two terms are quite different. Here’s a close comparison between these two: 

Grounds for Differentiation	ROAS	ROI
Focus and Scope	Measures revenue from ad spend	Measures return on any investment
Formula and Calculation	ROAS = Revenue ÷ Ad Spend	ROI = (Revenue – Investment) ÷ Investment
Insight Type	Depicts the effectiveness of ad campaigns	Shows overall investment profitability
Which One Should You Track?	Track ROAS for ad campaign performance	Track ROI for broader investment returns

If your ROAS is too low, it could mean your ad campaigns are underperforming, but does that mean they aren’t profitable? That’s where understanding break-even ROAS becomes crucial in assessing whether your ad spend is sustainable.

1. Focus and Scope

• ROAS is focused on ad spend and revenue, which is crucial to evaluate campaign performance. So, the parameter tells you how much money you are making from a campaign, as opposed to the actual money you are spending on the ads. 
• ROI on the other hand has a more holistic approach, as it looks at all costs (not just ads). This metric measures the overall profitability of your investment, including both marketing as well as operational expenses. 

2. ROI and ROAS Formula And Calculation

• ROAS = Revenue from Ads ÷ Cost of Ads
• ROI = Net Profit ÷ Cost of Investment x 100

3. Insight Type

• ROAS offers you short-term insights, especially for specific campaigns, so you can see how well your ads are performing. 
• On the other hand, ROI offers you long-term insights into your overall profitability, so you can analyze whether your overall marketing strategy is working for your business. 

4. Which One Should You Track?

Don’t get stuck in the fight of ROAS vs ROI because both metrics are valuable. However, it completely depends on your goals and broader marketing objectives. 

• If you want to assess the performance of a specific ad campaign, or marketing channel, ROAS can be your go-to metric. 
• However, if you want to know how well your total marketing investment is working for your business, ROI offers you a more comprehensive view. 

Common ROAS Mistakes and How to Avoid Them

Here are some common mistakes that can hurt your ROAS:

• Focusing on ROAS only: Yes, ROAS is important, but it’s not the only metric that matters. If you are getting a high ROAS, but low profit margins, you are missing the bigger picture. This is why you need to consider factors like Customer Lifetime Value (LTV) and Conversion Rates. 
• Ignoring Audience Targeting: You can have the best ad creative, but if you are showing it to the wrong people, your ROAS is bound to suffer. Ensure to refine your audience based on user intent, demographics, and past interactions, and test and tweak your ads regularly. 
• Not Optimizing Landing Pages: A killer ad means nothing if your landing page doesn’t seal the deal. Slow load times, confusing layouts, or weak CTAs can tank conversions, so optimize your landing pages for an effortless experience. 
• Scaling Too Quickly: When you find a winning ad, it’s tempting to pump in more money fast. But, scaling too quickly can lead to audience fatigue and higher costs. Instead, increase your budget gradually, and keep monitoring the performance. 

To avoid these mistakes and hike your ROAS, don’t forget to check out my guide on 7 Key Metrics to Improve Your ROAS. 

Practical Examples: How to Use ROAS and ROI in Your Marketing Campaigns

Let’s make this even more practical.

For instance, you are running an e-commerce store and launching a paid Facebook ad campaign. You can track ROAS to see how much revenue you’re generating specifically from the ad. If your ROAS is high, that’s a sign that your Facebook ads are working well!

But here’s the thing: what if the ad spend is the only cost you are considering? You, my friend, are missing a crucial piece. ROI will help you factor in product costs, operational overhead, shipping, and other expenses. By calculating ROI, you can get a more complete picture of how much profit you are actually making after all costs.

The Case of P-REX Hobby is one great example of how the right strategies can reap commendable results on ad spend. The ROAS here quite literally took off to a 10x ROAS on Facebook and an incredible 9 times ROAS on Google.

Wrapping Up: What Should be Your Next Steps?

Now that you have a close understanding of the ROAS vs ROI fundamentals, it’s high time that you put these important metrics to work. 

So, what’s next for you?

• Review your current campaigns and calculate ROAS to understand which are bringing the most revenue.
• Dig deeper and look at your overall marketing efforts and performance. Always consider calculating ROI to see the full picture of profitability.

Slay your marketing game. We are manifesting the whole “Cha-ching 2025” for you in terms of ad spend!