How to Evaluate the Effectiveness of Advertising Campaigns: ROMI, ROI, and ROAS

  • July 21, 2022
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How to Evaluate the Effectiveness of Advertising Campaigns: ROMI, ROI, and ROAS

There are a plethora of indicators that may be used to assess the efficacy of advertising efforts. ROI, ROAS, and ROMI are the three most commonly utilized metrics. Marketers frequently mix up ROI and ROMI, as well as ROI and ROAS. So, let’s take a closer look at the differences and which metric is ideal for evaluating the Effectiveness of Advertising Campaigns.

What Is the Difference Between ROI, ROMI, and ROAS?

ROI is a financial term for “return on investment” that measures the return from an expenditure, whereas ROAS stands for Return On Ad Spend and measures the success of an entire campaign.

ROI is a ratio representing how much money you earned against your advertising spend. ROI is not limited to monetary return; it can also be calculated from labor savings or increased efficiency as a result of product innovation. The main goal of ROI metrics is to determine whether revenue has been generated from an existing market or whether an untapped market must be pursued before further investments are made into that opportunity.

ROAS looks at ad-spend only and does not consider other sources of income such as services provided by sales staff, lab-time, etc. ROAS is a ratio representing how much money you made from your ad spend.

ROI can be calculated as gross margin or net profit divided by total assets times the average investment in those assets over a given period of time, minus any depreciation and amortization expenses.

ROMI stands for return on marketing investment and measures the monetary return from all online marketing initiatives including, web design and development, pay per click (PPC) campaigns, e-mail marketing efforts, social media engagement, and many more. ROMI looks at the entire process of converting visitors into customers and helps to determine which marketing activities are most profitable for a company’s online business model.

While ROI is used to evaluate any kind of expenditure, ROMI can be utilized to assess the monetary return of online advertising campaigns while ROAS measures the revenue made by an online advertisement campaign. Because these metrics focus on different aspects of a company’s business model, it is essential that they are calculated independently of one another. If any discrepancy occurs between measurements, you will need to pick the method that gives you the most accurate results.

For example, if your website receives a million visitors per month but only 1% of those visitors convert to customers, then ROMI will be significantly lower than ROAS because ROAS is entirely based on conversion rate alone. By utilizing these metrics independently, marketers are able to fully understand which types of online advertising are the most profitable for their business model.

How to Calculate Each of these Metrics

How to Calculate Each of these Metrics

ROI is calculated by taking the total cost of products or services that are sold, then subtracting any costs associated with running the business (marketing expenses), and finally dividing by the total amount of money invested in products/services. This can be represented mathematically like this:

ROI = (Net Return on Investment/ Cost of Investment) x 100%

Assume an investor paid $20 per share for 1,000 shares of a fictitious corporation GlobalPass Co. The investor sells the shares a year later for $24. During the one-year holding period, the investor received $1000 in dividends. In order to buy and sell the shares, the investor paid a total of $200 in trading commissions.

The investor’s ROI can be calculated as follows:

ROI = {[($24−$20)×1000]+$1000−$200}/{$20×1000} x 100

= ($4000+$800)/$20,000 x 100

= 0.24 x 100

= 24%

To calculate ROMI, marketers should choose a given time period to analyze their return on investment for online advertising efforts. Next, they need to figure out what their Marketing Expenses for this timeframe were. Furthermore, they’ll find the Gross Margin during these same dates. Finally, it’s just a matter of calculating ROI using this formula:

ROMI = [(Gross Margin – Marketing Expenses) / Marketing Expenses] x 100

Once marketers have their ROMI score, it’s important to compare these results against previous timeframes in order to see how successful the company has been at converting visitors to customers. It may be useful to use this information as a guide for making changes or improvements that can increase ROAS and ROMI in the future.

Let’s say you sell something for $100 and it costs you $30 to make. You spend another $10 on marketing (total cost = $40) and your gross margin is $60, so your ROMI would be calculated as follows:

Gross Margin = $60

Marketing Expenses = $10

ROMI = ($60-$10)/10 x 100

= ($50/$10) x 100

= 500%

ROAS is calculated using this formula:

ROAS = (Revenue from advertising / Cost of advertising) * 100

For example, if you spent $2,000 on Instagram ads in one month and your revenue that month comes to $5,000, your ROAS would be:

($5,000/$2,000) x 100

= $2.5 x 100

= 250% for every dollar you spent on advertising.

For ROAS, anything less than 100% should be considered a loss. 

Why Is It Crucial to Correctly Calculate ROI, ROMI, and ROAS?

Why Is It Crucial to Correctly Calculate ROI, ROMI, and ROAS?

Marketers must not only be able to measure the effectiveness of their online advertising campaigns but also understand how these metrics can impact a business’s marketing strategy. In order to properly do this, it is essential that ROI, ROMI, and ROAS are calculated independently from one another.

While all three metrics provide different measurements that help businesses make informed decisions about their online advertising efforts, they cannot be used in conjunction with one another. Industry best practices dictate that marketers need to know which types of results they’re getting from their website(s) so they can make more informed decisions when it comes time for re-investing or cutting costs. If any discrepancy occurs between the measurements of ROI, ROMI and ROAS then you will need to pick the method that gives you the most accurate results.

For example, if your website receives a million visitors per month but only 1% of those visitors convert to customers, then ROMI will be significantly lower than ROAS because ROAS is entirely based on conversion rate alone. By utilizing these metrics independently, marketers are able to fully understand which types of online advertising are the most profitable for their business model.

After calculating each metric, marketers should ask themselves what they are trying to measure with metrics like these. Are you looking for short-term profitability over multiple years? Are you interested in finding out if your overall marketing initiatives are profitable? Are your online advertisements working in conjunction with offline efforts?

Understanding how each metric is calculated will help marketers properly interpret ROMI, ROAS, and ROI so they are able to answer these questions. By doing so, you’ll be able to identify which marketing initiatives are most profitable for your business model.  

Challenges of Using Each Metric

Challenges of Using Each Metric

The biggest challenge that businesses face when it comes to using ROI as a means of measuring success is the length of time required to see if the financial projections will pan out. For example, for many companies to see a return on their investments (ROI) it can take anywhere from three months to several years depending on investment size and type.

One big challenge marketers face when using the ROAS metric is determining the value of ad space. This task becomes increasingly difficult as more businesses sell advertising space at different rates and to multiple parties (e.g., third-party advertisers, affiliate programs). The main issue with this scenario is that marketers have no idea which ads are being displayed alongside their content – thus making it extremely difficult to determine if their ads are actually converting.

The main challenge marketers face when using ROMI is trying to determine the direct value of customer acquisition from their online advertising campaigns. In other words, how much money did a specific marketing campaign make? While this may seem like a ridiculous question, it’s extremely important because ROMI is supposed to measure exactly that and any discrepancy in the number means your calculations may be flawed and you’ll need to reassess your advertising procedures.

Which Metric Should You Use?

ROAS is ideal for measuring ad campaigns while ROMI provides an overall account of all marketing initiatives and ROI should only be used in cases where it would provide more accuracy than either of the other metric by itself or when comparing different budgets against each other. For instance, ROI can be used when evaluating how profitable a company is when using only online advertising versus traditional marketing strategies combined with online ads.

All three metrics are very powerful tools for businesses looking to improve their marketing efforts, but marketers should know which metric provides the most accurate results for their business before investing in any campaigns. ROMI, ROAS, and ROI can be used in conjunction with one another. However, it is important that they are calculated independently from each other so you get an accurate result that can help your business on its path to growth.

Conclusion

In this article, we’ve discussed ROI, ROAS, and ROMI, what each metric means, and how it is calculated. We also explained the challenges associated with using each metric so you have a better understanding of how to use them in your marketing strategies.

While these metrics are extremely useful for evaluating online advertising initiatives, they cannot be used as standalone tools and require marketers to calculate them separately. The biggest challenge you’ll face when using these metrics will be correctly determining which formula should be used (and then actually calculating that formula) for each marketing initiative that has been undertaken by your company.

Once you’ve properly calculated ROMI, ROAS, and ROI, the next task will be making sense of all three formulas and finding out which metrics best suit your business model.

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