ROAS vs ROI: what is the difference?
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Founder, ProveWorth
Take a hypothetical one-truck example: $600 of ads wins five customers at $45 a month. That is $2,700 in sales over a year, a ROAS of 4.5. If doing the work costs $2,400, you lost $300.
ROAS compares sales with ad spend. Google Ads defines target ROAS as the average conversion value, such as revenue, you want for each dollar spent. Its example is $5 in sales per $1 of spend, a 500% target ROAS.
The catch is that ROI has no official definition. Use it to mean profit after all costs, and ask any vendor for the exact numerator, denominator and time window.
What does ROAS leave out?
It leaves out the cost of doing the work. ROAS counts sales, so labor, fuel, supplies and your own time never enter the ratio.
In the hypothetical example above, the ratio looks healthy at 4.5 while the business lost money. A high ROAS tells you the ads brought in sales. It does not tell you whether you kept any of them.
What belongs in ROI?
Profit after all costs. Start with the sales, subtract the cost of doing the work and the cost of winning the customer, and see what is left.
No Google or USPS page defines ROI, so this is my working definition. Ask any agency to say theirs out loud.
Why does a vendor's number look so good?
Because the vendor picks the formula. PostcardMania's case study of a landscaper reports 4,233 postcards, 20 responses and 15 new customers. It lists $30,000 in revenue on a $3,686 investment and calls that a 714% ROI.
That figure is revenue minus spend, divided by spend. It leaves out the cost of doing the jobs, so it is not a profit return. The same inputs give 8.14 times revenue to spend, which is a ROAS-style ratio.
The campaign also ran matching Google, Facebook and Instagram ads, and the vendor reports the results itself.
How do I ask an agency for the real numbers?
Ask what revenue or profit goes on top, what spend goes on the bottom and what period it covers. Then ask whether repeat work and your labor are in it.
If the answer is a bigger multiple with no formula, ask for the formula.
What do I do next?
Work out what a customer costs you in what is CAC. Then see how long one takes to pay that back in CAC payback period. The longer version is customer acquisition cost for service businesses.
Reviews on your own page are one source of customers you do not buy by the click. You can get your free page or see how it works.
Sources
Key takeaways
- 1ROAS compares sales with ad spend. ROI, as this page uses it, is profit after all costs.
- 2In the hypothetical example, $600 of ads returned $2,700 in sales, a ROAS of 4.5, and still lost $300.
- 3Google Ads defines target ROAS from conversion value, for example revenue, per dollar spent.
- 4A vendor's 714% ROI in one case study is revenue minus spend, so it is not profit.
- 5Ask any agency for the numerator, the denominator and the time window behind its number.
Related questions
What is the difference between ROAS and ROI?
ROAS compares sales with ad spend. ROI, as used here, is profit after every cost. A campaign can show a strong ROAS and still lose money.
What is ROAS?
Google Ads describes target ROAS as the average conversion value, for example revenue, you want for each dollar you spend on ads.
What costs belong in ROI?
The cost of doing the work and the cost of winning the customer. That means labor, fuel, supplies, ad spend and your own time.
Does 5x ROAS mean I made money?
Not by itself. Google's example of $5 in sales per $1 of spend is a 500% target ROAS, and it counts sales, not profit.
What should I ask an agency about its results?
Ask what goes on top, what goes on the bottom and what period it covers. Then ask whether repeat work and your labor are included.