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Paintbrushes with paintings in the background: painting the right ad picture with ROAS

ROAS vs. ROI: Painting the Right Picture

April 19th, 2017   ||    by Charlene Weisler   ||    No Comments

Return on ad spend, or ROAS, is used to calculate the revenue made by advertising, while taking the actual cost of advertising into account. It might seem straightforward, but it’s a hotly discussed metric these days—and for good reason. Knowing what does and doesn’t work in an advertising campaign provides insight that can have huge implications for marketing strategy.

Knowledge, as they say, is power—and having a clear understanding of return on investment (ROI) and ROAS can make all the difference.

Mapping Measurements

Let’s take a deeper look: Although often mistaken for the same thing, ROI and ROAS are very distinct metrics. “Return on investment calculates how ads contribute to an organization’s bottom line, while return on ad spend is a media-centric metric that measures the effectiveness of advertising campaigns,” says Walt Horstman, senior vice president and general manager of analytics and advertising at TiVo.

Tim Mayer, chief marketing officer at Trueffect, puts it another way in an AdExchanger article, “Return on investment measures the profit generated by ads relative to the cost of those ads. Return on ad spend measures gross revenue generated for every dollar spent on advertising. ROI optimizes to a strategy, while ROAS optimizes to a tactic.”

So you see, ROAS shows marketers which advertising campaign is working—and by how much—compared to other campaigns, while ROI takes into account the actual cost of the product or service being advertised. The clearest calculation comes from StraightNorth: return on investment = (revenue – cost)/cost, while return on ad spend = revenue/cost.

But where should you apply either metric? That depends on the end user of the information. “Advertisers and their CMO organization may lean towards ROAS to get a specific measurement of a campaign’s performance, while the CEO is more likely to be interested in overall ROI,” says Horstman.

Did Anyone Check the TV?

Now, since ROAS examines the benefit of specific ad campaigns—whether for linear TV or digital—the need for attributable, trackable data is vital. Media companies are exploring ways of measuring it in their television campaigns. “Many advertisers are not currently realizing the full potential of their TV advertising campaign,” explains David Poltrack, chief research officer at CBS, in a recent Media Village article. To that end, Poltrack has been developing the Campaign Performance Audit (CPA) in partnership with Nielsen Catalina, to help quantify ROAS.

There are challenges to using this metric for television because it treats advertising as a cost, and Mayer points out that it “can increase advertising expenses across all channels if marketers [are] seeking additional market share without the discipline of a defined profit margin target.” He adds that it can therefore be difficult to “understand the incrementality of each additional dollar of media spend.”

Because this metric reports specific advertising campaigns within specific channels, the results are siloed and do not take into account many consumers’ journeys over multiple platforms and channels. But, as Horstman explains, “As we add more advanced audience data to television for targeting and measurement, we can more accurately determine return on ad spend and how TV drives business outcomes.”

The best advice for television advertisers today? Recognize how the values of ROI and ROAS vary depending on the end user, and understand the pros and cons of relying on return on ad spend in a multi-touch media environment.

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