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What is ROI and how is it calculated?
ROI ( Return on Investment) measures the profit obtained in relation to the cost of the investment.
ROI formula:
👉ROI=((Revenues-Costs)/Costs)×100
Example: If you invest $1,000 in advertising and generate $5,000 in revenue:
👉ROI=((5000−1000)/1000)×100 = 400%
This means that, for every dollar invested, you made a $4 profit.
What is ROAS and how is it calculated?
ROAS ( Return on Ad Spend) measures the effectiveness of a specific advertising campaign.
ROAS formula:
👉ROAS=Revenues generated by advertising / Cost of advertising
Example: If you spend $500 on ads and generate $2,000 in sales.
👉ROAS=2000 / 500 = 4
This means that for every $1 invested in advertising, you get back $4 in revenue.
What is POAS and why is it more accurate?
POAS (Profit on Ad Spend) goes one step further than ROAS, it considers total costs and not only revenues.
POAS formula:
👉POAS=Net Profit / Advertising Cost
Example: If you invest $500 in advertising, you generate $1,000 in profit. POAS= 1000 / 500 = 2. This means that for every $1 invested in advertising, you made a $2 net profit.
Comparison: Why is it better to use POAS?
| Metrics | What does it measure? | Example | Why is important? |
|---|---|---|---|
| ROI | Return on every dollar invested on the investment | $4 profit for every $1 invested | Evaluates the overall profitability |
| ROAS | Return on adspending | $4 of revenue for every $1 in ads | Useful for measuring advertisingeffectiveness |
| POAS | Netincome on the expense in advertising | 2 net profit for every $1 in advertisements | Shows actual profitability after costs at advertising |
POAS is the best metric if you want to know how much you really earn after you really earn after costs are covered.
Do you have doubts about how to analyze metrics in your business with campaigns? Contact us and optimize your digital strategy today.