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What is ROI and ROAS: how to properly analyze advertising campaigns

15.08.2021

7 minutes

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ROI and ROAS help to assess the effectiveness and return on investment of advertising campaigns in Google Ads or other platform, to understand the correctness of actions and, thus, to rationally use the budget. However, these indicators are often misinterpreted, equated or completely ignored. As a result – incorrect conclusions about the success of the campaign, waste of the budget for ineffective, or even failed channels, losses.

In order not to have to light a cigarette from the ashes of a business, let’s figure out what’s what. Let’s talk about the importance of analysis, the fundamental difference between ROI and ROAS, we will tell you how to calculate ROI / ROAS, as well as what to do with the results.

Why it is important to understand and analyze ROI and ROAS correctly

Traffic, impressions, subscriptions, conversions allow you to see quantitative changes in work, but they do not say anything about the “quality” of advertising. You will not learn from them about the profitability and success of the Google Ads campaign. There is a high likelihood of not only drawing false conclusions about efficiency, but also not seeing serious problems.

Let’s take an example.

Let’s say you need to understand how successful a campaign is: how much revenue it brings.

We analyzed a Google Shopping campaign for an online medical device store. Nothing catastrophic at first glance, according to Google Analytics. Total income (revenue) exceeds expenses: the difference is $ 14,738:

Статистика кампаний в Analytics

You can always do better, more, higher, but it’s also not bad, right? We could stop at this point: why not, we are having some profit already.

However, let’s delve deeper into the analysis – we will tell you how to calculate the indicators later, now only numbers:

  1. The total ROAS is 147% (revenue / value). That is, for every dollar invested, the company receives $ 1.47 of income. This is a relatively good result.
  2. A large share of the profit came from the Shopping campaign – the first line on the screen. Its ROAS is 194% – $ 1.94 of income for every dollar invested.
  3. The rest of the campaigns show ROAS = 26%. This is where the implicit problem lies. It may seem that since the ROAS value is not negative, then everything is okay. But in fact, for 1 dollar invested, the advertiser receives only $ 0.26 of income. 

Since income in Google Analytics is displayed without taking into account the margin of goods, which can be 5%, or maybe 50, it is impossible to say that we are working in a positive way. If you ignore margins, your analysis of campaign performance will not be valid.

To get more accurate results, it is important to include marginality in the calculations and work out the return on investment as a whole. We did it automatically with the help of Panda ppc micro management software. And now look at the data of Google Shopping (the first one in the screenshot above):

  • total Profit / Loss (profit) is negative;
  • ROI (return on investment) is -31%.
Расчет ROI d Panda ppc micro management tool

And all this speaks of losses, despite the positive ROAS values.

If it weren’t for the analysis, the client would have thought that it was working perfectly, because according to Google Analytics, campaigns generally turn out to be profitable. In fact, they are losing money not only in search but also in Shopping campaigns. And it’s important to revive the business.

Let’s say you need to make a bid management decision for a specific item. A Google Shopping campaign shows the following results:

Revenue, $

Cost, $

ROAS, %

Possible actions

1000

400

250

Change nothing or raise bids

The result is pretty good. If ROAS = 250%, it is reasonable to raise bids. And besides, if you worked with bidding manually before, you can already set up Target ROAS – an automatic bidding strategy in Google Ads. And make a decision on the increase, tracking further statistics.

However, if we take into account the marginality, the picture will change:

Revenue, $

Cost, $

ROAS, %

Margin, %

Profit/Loss, $

ROI, %

Possible action

1000

400

250

15

-250

-62,5

Reduce the bid or

stop ads

Along with the numbers, the possible options for action also change.

If you only focus on ROAS and still use an automated bidding strategy, you can run into losses.

Taking into account the marginality, we see the real efficiency of the product and can make the right decisions to adjust the strategy in order to get the maximum return on investment.

But for a competent analysis of ROI and ROAS, as well as to draw the right conclusions and develop a new strategy, you need to understand the essence of the metrics and their fundamental difference. So…

ROI: definition, calculation, analysis of results

ROI (return on investment) – return on investment. Shows the level of profitability / loss ratio of the company, taking into account all costs and margins of goods.

If there is no data on the costs of office maintenance, rent, salary, and so on, but you know the investment in marketing, you can calculate the ROMI (return on marketing investment). So, marketers can talk about ROI, but mean ROMI.

The KPI is important for making strategic decisions. With its help, you can understand:

  • how advertising affects the outcome for business;
  • how profitable the advertising campaign is;
  • whether you are moving in the right direction and whether it is worth changing something.

ROI formula:

ROI = (income * marginality – costs) / costs * 100 %,

where income – income (earnings) from sales through advertising;

costs – advertising spend;

marginality is the difference between price and cost. It is calculated as the ratio of the difference in price and cost to the price:

Margin = (price – cost) / price * 100 %

Google Ads and Google Analytics don’t calculate ROI. This issue is solved in several ways:

#1. Manually: Upload statistics from Google Ads to Google Sheet.

Go to Google Ads – Shopping Campaigns – Product Groups— Upload to Google Sheet:

Panda ppc micro management tool

And then manually edit the table. In this case, it is important to be sure to indicate the marginality of each product. Without this, it will not be possible to correctly calculate the final income and ROI, as well as draw relevant conclusions about the effectiveness of the Google Ads account.

Отчет для Panda ppc micro management tool

The process is laborious and long: you will have to do everything by hand. However, this is necessary if you want to determine the effectiveness of advertising for each product and identify holes.

No. 2. Automatically by Panda ppc micro management.

FREE audit of Google Shopping campaigns – leave your request to get step-by-step report and plan for optimization to boost your store!

To generate a report, go to Panda and follow the instructions ↓

Panda ppc micro management tool will generate a report with total and unit ROI in a couple of minutes:

Как пользоваться Panda ppc micro management tool

ROI can be either positive or negative. Index:

  • > 0 – the investment paid off;
  • <0 – the campaign caused losses;
  • = 0 – break-even point: the investment paid off, but nothing was earned.

ROAS: definition, calculation, analysis of results

ROAS – the return on ad spend. It shows the amount of revenue per dollar invested and helps you gauge the performance of your campaign, group, ad, and even keyword.

Formula:

ROAS = income / expenses* 100 %,

where income is the amount of income received from the advertising campaign in Google Ads;

expenses – the sum of spends exclusively on the advertising campaign.

Important: the calculations take into account the budget for launching and supporting the campaign. At the same time, expenses do not include, for example, the salary of a designer, PPC specialist or copywriter, as well as the cost of goods and the cost of delivery.

You can see the revenue and cost data by generating a Google Ads report in Google Analytics, it will also be visible in other reports if eCommerce is selected:

Использование Panda ppc micro management tool

You don’t have to manually calculate ROAS. The data is automatically displayed in your Google Analytics account. In the Google Ads report, switch to Clicks:

Использование Panda ppc micro management tool

Result:

Статистика кампаний в Google Analytics

Or go to “Columns” in the Google Ads report, find and add the conversion value / cost column:

Статистика кампаний в Google Analytics

The resulting data will show the income for every dollar spent, for example:

  • ROAS> 100% – profitable campaign. So, ROAS 200% says that for $ 1 of investments an income of $ 2 was received;
  • ROAS = 100% means that the campaign worked at zero, received an income of $ 1 for $ 1 of investments;
  • ROAS <100% – the campaign is unprofitable. So, ROAS 50% means that for $ 1 of investments, $ 0.5 of income was gained.

ROI vs ROAS difference

Despite the fact that both ROI and ROAS show the effectiveness of advertising campaigns, they are still different KPIs. They should not be confused, much less equated.

The fundamental ROAS/ROI difference is that when evaluating ROI, marginality is taken into account, and when ROAS it is not. This makes the latter indicator unreliable and the results can be misleading.

One of our clients had the following data:

  • income – $ 29,059;
  • advertising cost – $ 8547;
  • marginality – 15%;
  • ROAS – 340%.

The advertising seems to have worked fine and generated income. At the same time, when we analyzed the data deeper, we saw:

ROI = ($ 29059 * $ 0.15 – $ 8547) / $ 8547 = -49%

In fact, advertising is unprofitable. Minus forty-nine percent ROI KPI is a disaster.

Focus only on ROAS KPI – is like to weigh sugar by eye in a store.

At the same time, ROAS metric is still a necessary tool that allows you to estimate the profitability / loss ratio of an advertising campaign in the absence of data on marginality, therefore, if it is impossible to find out ROI. You can also calculate at what ROAS the campaign will reach the desired indicators or work to zero. In the future, when analyzing statistics, it will immediately become clear whether it is effective. You can also determine which ROAS is the target metric by determining the desired or minimum ROAS, and test your campaign with the Target ROAS bid strategy.

Such an approach to the analysis of ROAS and ROI means rational use of the budget, competent management of strategies and, as a result, the opportunity to increase income.

FREE audit of Google Shopping campaigns – leave your request to get step-by-step report and plan for optimization to boost your store!

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