Over the past ten years, Facebook advertising has evolved from simple banner ads and listings to become a highly complex tool to target distinct demographics. Yet despite being one of the most common marketing tools out there, many marketers still misuse and miscalculate ROI and ROAS for Facebook ads, or have questions about the difference between ROAS and ROI, and how to optimize Facebook ROI and improve ROAS.
What is the difference between Facebook ROAS and Facebook ROI?
Facebook’s Return on Ad Spend (ROAS) measures the revenue generated as compared to the money spent on an advertising. ROAS is an advertising metric that measures the direct impact of dollars spent on advertising results and allows you to assess the performance of a campaign, without taking into consideration the additional costs of operations, training, etc. In order for a ROAS to be profitable, it has to been over 100%, as the initial 100% ROAS is recapping money spent.
Facebook’s Return on Investment (ROI) measures the return on your OVERALL investment and takes into consideration not only dollars spent, but the time, energy, labor, and intangible resources spent on generating this return. One could also argue that the “return” in this case goes beyond revenue created. It is a business metric, meaning that it measures not only the performance of an ad but the performance of your effort and your team.
We have an example of how to calculate the two later in this post, but let’s have a look at what the two actually measure.
What does ROI measure? What does ROAS measure?
In the table below I outline some of the things you may (or may not) figure into your marketing analytics to get a grip on your ROAS and your ROI.
As you can tell, ROI measures a number of factors, and the “Return” in ROI could be defined in several ways (such as social media reach, profits, etc.), making this both the most wonderful and frustrating metric.
Is ROAS a good Facebook marketing metric?
As you can see above, the tricky thing about ROAS is that while it accurately presents the impact of your marketing dollars, it doesn’t accurately reflect the expense of the product or the marketing team, making it a much more beneficial metric for digital products than physical products.
In Google AdWords, it is possible to calculate dynamic variables (such as cost), but at the time being this isn’t possible in Facebook. Fortunately, by using Facebook Pixel you can start tracking consumer behavior on your website, giving you the necessary information to accurately assess your ROI.
How are Facebook ROI and Facebook ROAS calculated?
Here is how to calculate Facebook ROI:
ROI Formula: ROI = (Revenue – Costs) / Costs
Percent ROI = (Revenue – Costs) x (100 / Costs)
Here is how to calculate Facebook ROAS:
ROAS Formula: ROAS = Revenue / Cost
Percent ROAS = (Revenue – Cost) x (100/Cost)
The table above clearly illustrates the difference between ROI and ROAS, and how ROI can be negative while ROAS is positive. The ROAS for campaign 1 is .5, or 50%, which is not profitable. In order for the campaign to break even they would either have to lower their PPC bid by 50%, or improve their strategy to bring their ROAS higher than 1.
As ROAS is a simple ratio metric, it is possible for your ads to have a higher ROAS but generate less profit.
The misleading nature of ROAS
The next question that always comes up is: which is the better marketing analytic: ROI or ROAS? While I generally prefer ROI, there is a lot of value in understanding both and temporarily lowering ROI in order to optimize and increase long-term ROAS, and thus further improve ROI.
Allow me to illustrate:
A few years back I challenged a client to increase their sales by lowering their ROAS. Coming from a traditional background, he was convinced that larger ad budgets and greater exposure were the best ways to drive sales. But by paying a consultant, narrowing down their audience and temporarily lowering their ROAS, they were able to target more relevant clients and increase ROI in the long run. The second sample campaign took about five times as long to plan, had more employee costs, was 15x more per click and garnered 10,000 fewer likes, but it cost half as much and created a small but significant increase in sales and plugged them into an audience who loves to buy their products, rather than liking them.
So you see, temporarily lowering your ROI and ROAS (or, you could say, temporarily investing more money in market research and making informed decisions about ad spend) can dramatically increase your ROI and make your marketing efforts more scalable.
Audience building is another place where focusing on decreasing your ROAS can drastically raise your ROI. By spending the extra time to sort out audience types by category and creating campaigns targeting them, you will avoid having Facebook’s algorithm will quickly skew towards the highest performing audience and sinking all of your money into that one audience. Your performance may temporarily suffer, but your results will thank you for it.
Using ROI to optimize your Facebook campaigns
Facebook campaign budget optimization automatically optimizes your advertising budget at a campaign level, but if you are only looking at ROAS without considering ROI, you’ll miss the fact that the automation is only going after low-hanging fruit. This, as well as teams with low efficiency and projects that require complex collateral, are invisible bottlenecks that may cost you in the long run. A 10% gain in high-value customers will be much harder to gain than a 30% increase in lower-value customers, but which is more important? And which has greater potential for long-term results?
Here’s another example:
In the fall of 2018, a company named Lingokids was running ads internationally and spending a significant amount of time creating and managing those ad sets. By understanding their true investment and adopting dynamic language optimization, they were able to reduce their workload while lowering their app install cost by 26% and increased conversions by 11%.
The big picture
So which is more important: ROI or ROAS? Many people assume that there is no significant difference between ROI and ROAS, but hopefully, after reading this article, you’ll not only understand the difference but also how to strategically use these two figures to optimize both your team’s performance and your advertising budget.