HOW TO CALCULATE ROI, ROAS AND ROMI. CALCULATOR, CALCULATION, DIFFERENCES
Is 300%, 500% and even 1000% ROI a myth or reality? It all depends on the calculation formulas. We will tell you about the tricks of marketers and teach you how to calculate ROI, ROMI, ROAS as easy times tables. You will learn to see manipulations in reports and even manipulate numbers if you want;) Let's start!
December 2, 2020
16 minutes to read
Special metrics help to determine the effectiveness of advertising. You probably already know about them and are actively using them. But knowing doesn't mean strike it rich. Despite the fact that formulas are used in calculating ROI, ROMI and ROAS, high rates do not always guarantee positive dynamics.
In this article, you will learn how:
distinguish between these really, really, really similar abbreviations,
reduce financial risks,
save time on calculations.
And at the very end, we will talk about an alternative (and fast!) way to evaluate the effectiveness of advertising for e-commerce. Ready? Let's go!
ROI is the rate of return on investment (or a specific amount). Measured in percentages.
ROI shows how profitable or unprofitable a project is. Onion is worth peeling... and time for formulas and calculations too. Investments include production costs, rental of premises, salaries, logistics, advertising, payment for services and other expenses.
ROI is one of the main metrics in marketing that will help: → Determine the profitability of the business. → Calculate the profitability of different advertising channels. → Effectively plan your advertising budget. → Do not burn out ??
ROMIis the return on investment in marketing (advertising budget only, excluding prime cost).
ROMI is a universal and most common metric. It will help to determine which advertising channel is worth investing in, and which ones to refuse. For example, company N's ROI from content marketing can be higher than from display ads. Based on this, it is more rational to allocate the most of the budget for content.
ROAS is the rate of return on advertising spend. ROAS assess the effectiveness of not all marketing budget expenses. ROAS does not include costs for analytics, PR, production and others.
ROAS will show you which advertising channel is generating revenue. You can evaluate both the whole advertising campaign and a separate ad or keyword. For example, is it worth the time and effort to find keywords for Search Ads or is it more profitable to launch a campaign on Google Shopping.
Why and when to calculate ROI, ROMI, ROAS
Formula and nuances of calculating ROI
When to count it?
ROI is not a static metric, but rather an "actionable metric". ROI implies certain actions after a miscalculation. It helps in cases when you need to make an important marketing decision, but you don't want to take a lot of risks.
Timely calculated ROIwill help have a close shave if the strategy turns out to be ineffective
How to count it?
You cannot calculate ROI using Google Ads and Google Analytics. This can be done:
1. Automatically: — In tables like Google Sheets (if you have a lot of time to drive in data or are not afraid to be getting caught in indicators). — With the help of special services: for example, Checkroi calculators.
Gained is funds from a specific project in a specific period of time. Spent is the amount of all investments made.
You have a staff of seven. You sell a service 35 times a month for $ 500. You spend $ 10.000 on office rent, salaries and other expenses. The company is not advertised, but you understand that you can provide another 20-30 services.
Without contractors: Money turnover: 35 x $ 500 = $ 17.500 Profit: $ 17500 ? $ 10.000 = $ 7500
Hire $ 50 contractors and throw $ 1000 into ads. As a result, you get 15 new contacts, 10 of which become clients.
ROI > 0 is already a positive trend. ROI > 100% → Revenue is twice the cost. This is a good indicator for optimizing costs, especially for advertising. But do not rush to immediately throw in funds for promotion. Analyze first: are you considering the whole context. High ROI is not always good profit. Typically, a high ROI means a miscalculated ROI. First of all, rely on real indicators of income and money spent.
The opposite is similar. Low ROI with big profits. Such an indicator is considered the norm when analyzing the sales of specialized goods (for example, expensive professional equipment).
Your manager bought a car for $ 10.000 (total expense). Within two weeks, the manager himself found repairmen. The repair cost $ 3000 (total expense). The manager's salary is $ 1000. He spent a third of the working day (total expense ~ $ 333). The manager sold the car for $ 20.000 (income). For sale, the manager ordered advertising on the websites of car dealerships for $ 400 (marketing expense). And he got an allowance of $ 200 (total expense). There are no expenses for renting a warehouse and other employees.
All expenses must be included in the ROI calculation
Formula and nuances of calculating ROMI
An advertising campaign does not always reach the initial goal. A customer can see ads, visit a website, but never buy. Or buy, but later — in the same open tab or find a site in Google. The advertisement worked, but this indicator will not appear in the metrics.
What's the good ROMI?
ROMI > 100% → Advertising is profitable (every dollar spent is returned and generates income). ROMI = 100% → Advertising worked to zero (the invested money returned, but no income). ROMI < 100% → Advertising works in a negative way (investments in marketing are unprofitable).
The optimal rate ROMI > 20%.
ROMI= (Advertising total revenue – Advertising total costs) / Advertising total costs * 100
Advertising total revenue is the funds from a specific advertising campaign. Advertising total costs is the amount of money spent on an advertising campaign.
Imagine that you have your own production of tables. Prime cost of raw materials per table is $ 100. You sell 35 tables for $ 500 per month. It costs $ 6500 for an assembler, a sales manager, a designer, as well as an office and a warehouse.
It is important to check not only the overall indicator. Always consider the possibility that the product, service can not be bought. Keep in mind the different margins: if you sell one product for $ 20 for $ 100, and the second for $ 1000, it is advisable to share the priority of ROAS.
What's the good ROAS?
If we compare several advertising campaigns, you will easily notice the difference between a profitable and unprofitable advertising.
ROAS < 100% → Advertising is unprofitable. ROAS = 100% → Advertising worked at zero (break-even point). ROAS > 100% → Advertising campaign was successful.
Information for calculating the payback period can be taken from analytics services, for example, in Google Analytics based on e-commerce data.
To calculate also suitable Google Data Studio and PowerBI.
ROAS= Advertising total revenue / Advertising total costs * 100
Advertising total revenue is funds from a specific advertising campaign. Advertising total costs are the money spent on an advertising campaign.
You have been working in e-commerce for a long time: you have about 20 different product categories in your web store. You spend $ 4000 on the salary of three managers, an Internet provider, electricity in the warehouse and other expenses. Your company is well-known even without advertising, you are about 80% full of work with orders.
You have decided to include expertise on PPC for backpack sales. Agency services cost $ 450. We spent $ 1500 on the advertising budget. As a result, we received 150 orders and 120 sales per month. The average bill — $ 80. The primecost of one position — $ 30. There are no cross analytics and CRM integration with the website. Marketers are happy: 150 purchases and the cost of the application is $ 1500/150 = $ 10.
You sell goods for $ 9600 ($ 12 * 80). It took about 10% of the working time to work with all the buyers, it cost $ 400. To scale changes advertising, one more specialist is needed.
It is believed that the ROI is more of a general analytical metric that applies to any business area to assess return on investment.
ROMI has a narrower application: exclusively for the analysis of marketing investments. The calculation does not include the standard cost of maintaining a business.
In simple terms, only the owner can calculate ROI. The marketing agency does not know the company's costs, so ROMI is universally calculated.
The primary goal of ROAS is to determine if a business is making a profit from advertising. The indicator is effective in optimizing advertising costs: it shows how to get the maximum profit with the minimum investment.
ROI is often compared to ROMI (and calculated using the ROMI formula). This is wrong. Real income and revenue are often confused.
By confusing ROI, ROMI and ROAS, you risk drawing the wrong conclusions. So, if ROI of 100% means double income, then 100% ROAS is an indicator that the investment simply paid off without profit.
It is strategically more important to understand in which particular case it is better to rely on which metric. And many other factors must be considered.
CEO of www.alibelle.com
It is more important to focus on ROAS at work. You can customize these metrics in Google Data Studio and PowerBI.
Example. At the start, you had an advertising campaign with a budget of $ 800, which eventually helped to earn $ 8000. Optimization of advertising pulled another $ 1000. Obviously, the campaign is not working at full capacity. For the first six months, I recommend focusing on ROAS. When your ad budget reaches $ 2,000 (and sales reach $ 20,000), you can add ROMI in parallel.
An alternative way for e-commerce to quickly find out the effectiveness in Google Ads is to calculate the ratio of the amount of revenue to the advertising budget.
Important to keep in mind
If you are calculating ROI, then a reasonable way would be to choose a period without global changes: neither in the advertising campaign, nor in the production area. The level of profit can be significantly influenced by seasonality, price increases in the market and other economic factors.
The ROMI indicator will turn out to be incorrect when analyzing very expensive products and delayed sales. For example, before buying real estate, a client may think over different options for a long time. And it is not clear what exactly will influence his decision: advertising, exchange rate or mood ??
ROAS is indicative only within one channel. A person can see and click on an ad in one marketing channel, and buy a product after a while through a completely different channel.
The correct application of metrics helps to correctly allocate the budget, without wasting money on ineffective strategies.
It is important to remember about the errors in the calculation of the coefficients. Seasonality, economic changes, high cost, delayed sales, and other factors can influence results.
Make regular calculations. This will help you find the most effective channels and specific goods to which you should direct the bulk of your advertising budget.
For investments and expensive purchases, it is better to calculate ROI, and control the cost per lead for advertising contractors.
For e-commerce, we recommend calculating ROAS.
Use calculators for convenience, leave the analytics to yourself!
Marketer since 2013. CEO of www.alibelle.com
Editor at www.alibelle.com. She writes simply about the important.
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Experience with Magento, WordPress, Shopify, Yelp, Amazon, eBay, Joomla, Drupal, Horoshop, OpenCart. I know all the nuances and features of these platforms.
I work with a team to whom I entrust routine work or areas where automatism is perfected. I leave the analytics and strategy to myself. Therefore, you will be able to receive quality advice for the business.
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