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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 investment |
$4 profit for every $1 invested | Evaluates the overall profitability |
| ROAS | Return on ad spend |
$4 of revenue per $1 of ad spend | Useful for measuring advertising effectiveness |
| SOP | Net profit on spending on advertising |
2 net profit for every $1 in ads |
Shows actual profitability after advertising costs |
POAS is the best metric if you want to know how much you really earn after you really earn after costs are covered.