Your ad spend is only a fraction of your investment. To figure out the true ROI of your marketing efforts, you need more than a vanity metric.
Measuring campaign performance is an integral part of your marketing optimization. Choosing your campaign KPIs can have a huge impact on how you measure and conceive your failure or success. Though visibility and engagement metrics (impressions, CTR, click rate) will help you gauge your reach, return on investment metrics (CPC, cost per conversion, ROAS, ROMI) will help you objectively determine your campaign's revenue contribution.
But how objectively?
ROAS—return on ad spend—is ad networks' preferred metric. It emphasizes the revenue created by the campaigns you run on their networks, while ignoring much of the spend associated with these campaigns. In that respect ROAS is a vanity metric, which may bode well for the ad networks' goal of enticing you to spend more of your marketing budget with them, but has little to do with the actual success—or lack thereof—of your campaigns.
That's why return on marketing investment (ROMI) is rapidly gaining popularity as a more informative metric that gives you actual insights to fuel your marketing optimization.
What Is Return on Ad Spend?
ROAS is the most basic way to calculate how much you've earned from your marketing campaign.
Here's how you work it out: You take your sales revenue from the campaign period, and you divide it by how much you spent on ads.
For example, if you spent $1,000 on Facebook Ads this month, and your revenue was $10,000, your ROAS would be 10, A tenfold return on investment. Whoop!
Simple, huh? The trouble is, it's vastly oversimplified. As we'll see in a moment, ROAS can become very misleading for that very reason.
Because of its limited scope, it can hardly be thought of as a true ROI metric.
What Is Return on Marketing Investment?
ROMI, on the other hand, is a subset of the ROI metric: It doesn't look at all the spend associated with your business, but at the spend associated with your marketing efforts.
There are two common ways to calculate ROMI—with and without cost of goods sold (COGS), and they can lead to vastly different numbers. In this article, I'm referring to COGS-inclusive ROMI, but your decision should be based on the specifics of your business. The important thing is to stick to one calculation method to make sure you're comparing apples to apples.
With or without COGS, ROMI takes into account all of the costs of running your marketing campaign—not just your ad spend. That includes what you pay out for content creation, agency fees, discounts, etc.
When considering COGS, ROMI takes into account only the money you have in your pocket from sales—i.e., your profits, not your revenue. You start with the profit margin you make on each item and subtract costs like packing and shipping.
Then, bearing all of that in mind, to calculate ROMI, you divide the profits from your marketing campaign by the total cost of running that campaign.
OK, So How Does That Make a Difference?
It's worth mentioning that no matter how you calculate your marketing spend, profitability may not always be your main driver. One such case is awareness campaigns, for which the investment is long-term; there's no expectation of immediate returns. That said, ROMI still gives you a far more complete and accurate picture of how your marketing campaign performed.
To take the earlier example, let's say that as well as the $1,000 you spent on Facebook ads, you also paid an agency $1,000 to make the ads.
And let's say that the item you are selling is lip liner, and your $10,000 in revenue was made up of 1,000 units sold at $10 each.
Those units cost you $5 each, though, so you only make a profit of $5 on each one. Plus, it costs you $2 to package and post (P&P) each unit.
What's more, these sales were all made with the $1 discount code that you gave out in your ads. That means you effectively spent $1,000 on making those sales happen.
- So the cost of running your campaign was actually $1,000 (ad spend) + $1,000 (content creation) + $1,000 = $3,000
- And your profit for the period was actually $10,000 (sales income) - $5,000 (cost of the goods) - $2,000 (P&P) = $3,000
- And so, your ROMI for the campaigns was $3,000/$3,000 = $1
As in: for every $1 you spent on your marketing campaign, you earned... $1.
Why Is ROMI Better?
The big problem with ROAS is that it lets the ad network take credit for all your sales revenue while ignoring any inconvenient costs and calculations that tell a different story.
ROMI acts as a much-needed reality check. It tells you what the real returns are on your marketing investment—and it lets you put your ad spend in context: Sure, your Facebook ads might be getting a lot of traction, but if the campaign is flawed in some way, you need to know that before you consider scaling up your ad spend.
How Does All That Work in Practice?
Such attention to detail turned out to be hugely important in two campaigns for the snack brand Mattessons Fridge Raiders in 2013 and 2014-2015.
For its first campaign, the brand came up with a cool idea. Using Facebook ads that linked through to a longer YouTube video, it crowdsourced ideas for a "snacking device" that would allow people to snack without using their hands—to avoid touching keyboards, phones and so on with greasy fingers.
Mattessons' Facebook campaign generated 120 million ad impressions on Facebook and, during the three months of the campaign, there was a healthy spike in sales. However, they dwindled again once the campaign was over. That was bad news, considering the primary marketing objectives were about long-term growth.
Rather than just running more Facebook ads, the company took a good hard look at its ROMI over the period. It figured out that the campaign was too focused on short-term goals rather than deepening people's connection with the brand. To tackle that issue, it created an AI robot that target consumers could interact with online, and it expanded the campaign to TV ads, all over a seven-month period.
Four months after the second campaign was over, net sales were still up 70% and the overall long-term ROMI was 1.87—i.e., a return of $1.87 for every $1 spent.
If the company had simply fixated on ROAS, it would still be pouring in money to Facebook ads each month, with diminishing returns!
Even if your marketing campaigns look like they're meeting your short-term marketing objectives, it's crucial to dive in to view every cog in the machine with a critical eye.
Perhaps your ad spend really does drive your profits. Maybe your overall marketing campaign is solid but the Facebook ads element of it isn't really contributing to your success in any meaningful way. Perhaps it's even creating a huge expense that doesn't directly translate into sales.
Whatever the truth of the matter, you need to be able to analyze it carefully for yourself if you're going to optimize your spend and boost your marketing ROI over time.
ROAS doesn't let you do that... but ROMI can.
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