ROI, ROMI and ROAS: What is the Difference and How to Calculate

Imagine you're running a small online business. You've poured money into creating a website, buying products, and promoting your brand. As sales start trickling in, you find yourself wondering, "Am I really getting my money's worth?"

Understanding how to measure the effectiveness of your investments is crucial for making smart business decisions. This is where three important metrics come into play: ROI, ROMI, and ROAS. Each of these helps you see how much return you're getting for every dollar spent.

Think of ROI as a simple measure of overall profitability. It tells you if your investments, whether in new products or equipment, are paying off. ROMI, on the other hand, zooms in on your marketing efforts. It shows which campaigns are turning into revenue and which might need rethinking. Finally, ROAS focuses specifically on advertising, helping you figure out if your ad spend is generating enough sales to justify the cost.

In this article, we’ll break down these metrics in simple terms, explaining how they work and how they can guide your business decisions. Whether you’re new to these concepts or looking to refine your understanding, you’ll discover how to use ROI, ROMI, and ROAS to ensure your business investments are truly worthwhile.

1 What is ROI (Return on Investment)

Return on Investment (ROI) is a way to measure how much money you make from an investment compared to how much you spent on it. It helps you understand if an investment is worth the cost. ROI is used in all kinds of investments, like starting a new business, buying equipment, or launching a new product. It's a key metric to see if you're getting good returns or if you need to rethink where you're putting your money.

ROI formula:

Return on Investment (ROI) = [(Total Revenue-Investment Cost) Investment Cost​] 100 

ROI is a valuable metric for measuring how well an investment is performing over a specific period. When calculating ROI, it’s important to ensure that there are no significant changes in business circumstances during this time, like price increases or changes in suppliers, as these can affect the results. The calculation involves comparing the money earned (revenue) to all the costs incurred (investments).

The appropriate time frame for calculating ROI depends on your business's sales cycle. A short cycle might require monthly calculations, while a longer cycle might mean evaluating ROI quarterly or annually.

What is a good ROI?

A good ROI is any result above 0%, which means that your investment has generated a profit. If the ROI is below 0%, it indicates a loss, meaning the business spent more than it earned. An ROI of exactly 0% means that the business has broken even, recovering the costs without making any additional profit. The higher the ROI, the better, as it signifies a more successful investment. However, what constitutes a "good" ROI can vary depending on the industry and the specific goals of the business. Generally, a consistently positive ROI is a sign of effective investment and business strategy.

Example

Imagine you own a cozy bookshop called "The Book Nook". In October, you decide to revamp your offerings by investing $8,000 in a fresh collection of books to attract more customers. You also spend $4,000 on salaries to keep your staff motivated and provide excellent service. Additionally, you allocate $2,000 for an advertising campaign to spread the word about your new arrivals. By the end of the month, your efforts pay off, and the shop earns $16,000 in total sales.

To understand how well your investments performed, you calculate the ROI:

ROI = [ (16,000−14,000) / 14,000] × 100 = 14.29%

Result: The ROI is 14.29%. This means your October investments resulted in a 14.29% return. It’s a positive outcome, showing that the resources you put into your bookshop not only covered the costs but also brought in a profit. While the ROI isn’t sky-high, it indicates that your strategy of updating the collection and running an advertising campaign was effective in drawing customers and boosting sales.

The experience of seeing your investment translate into tangible profits is rewarding, reinforcing your belief in the decisions you made for "The Book Nook." With this understanding, you’re now inspired to explore more ways to enhance customer experience and drive even greater returns in the coming months.

How to increase ROI

1. Evaluate marketing channels. Analyze the effectiveness of each marketing channel and stop or adjust those that are not performing well. Focusing on the most profitable channels can help increase ROI.
2. Target the right audience. Ensure that your marketing efforts are directed toward the right audience. If the current audience is not converting, it might be due to targeting the wrong group in your ads.
3. Align sales and marketing. Improve communication between sales and marketing teams. Sometimes, a successful marketing campaign can fall flat if the sales team doesn’t properly handle the leads it generates.
4. Set realistic goals. Review your business goals to ensure they are achievable with the resources available. Unrealistic goals can lead to disappointment if they are unattainable given current constraints.

2 What is ROMI (Return on Marketing Investment)

Return on Marketing Investment (ROMI) focuses on how much money you make from your marketing efforts compared to how much you spent on them. It helps you see which marketing strategies are working and which ones aren't. By looking at ROMI, businesses can figure out if their marketing dollars are well spent and make adjustments to get better results.

ROMI formula:

Return on Marketing Investment (ROMI)=[(Revenue from Marketing-Cost of Marketing) Cost of Marketing] 100 

When calculating ROMI, it's important to consider any external factors that might affect your marketing results, such as changes in consumer behavior or seasonal trends. The time frame for calculating ROMI should align with your marketing campaign cycles, whether they are monthly, quarterly, or annually.

What is a good ROMI?

A good ROMI is typically above 100%, which indicates that the marketing efforts are generating more revenue than the cost. If ROMI is below 100%, it means that the marketing expenses outweigh the revenue they bring in, suggesting the need for a strategy reevaluation. A ROMI of exactly 100% implies that the marketing investment broke even, covering its costs without making additional profit.

Example

Imagine you run a small online bakery called "Sweet Treats". You decide to launch a special fall-themed marketing campaign, spending $1,000 on social media ads and $500 on email promotions. The campaign attracts many new customers, generating $4,000 in additional sales.

To see how effective your marketing efforts were, you calculate the ROMI:

ROMI= [ (4,000−1,500) / 1,500] × 100 = 166.67%

Result: The ROMI is 166.67%. This means that for every dollar spent on marketing, you earned $1.67 in profit. This 166.67% ROMI indicates that your campaign was successful in attracting customers and boosting sales, far exceeding the cost of the marketing activities.

Your excitement grows as you realize the potential of your marketing strategies. Knowing that your campaign resonated well with customers, you plan to use similar approaches in future promotions, confident that you can achieve even greater results.

How to increase ROMI

1. Analyze marketing channels. Regularly review the performance of each marketing channel and focus on those that deliver the best results.
2. Refine targeting. Make sure your marketing messages reach the right audience. Adjust your targeting to attract high-quality leads more likely to convert.
3. Enhance marketing-sales alignment. Ensure your marketing and sales teams are working together effectively. A well-coordinated approach can improve lead conversion rates.
4. Set clear objectives. Define realistic marketing goals that align with your overall business objectives. Having clear targets will guide your efforts and improve efficiency.

3 What is ROAS (Return on Advertising Spend)

Return on Advertising Spend (ROAS) is all about measuring the revenue you earn from your advertising compared to what you spent on ads. It's a more specific metric than ROI and ROMI, focusing only on advertising. ROAS helps businesses see which ads are most effective, allowing them to optimize their ad budgets and improve the performance of their advertising campaigns.

ROAS formula:

Return on Advertising Spend (ROAS) = Revenue from Ads Cost of Ads

When calculating ROAS, it's important to consider the overall goals of your advertising campaigns and the channels you are using. Different advertising platforms might yield different ROAS, and understanding these differences can help you allocate your budget more effectively. The time frame for calculating ROAS should match the duration of your ad campaigns, whether they're weekly, monthly, or campaign-specific.

What is a good ROAS?

A good ROAS generally means that the revenue generated from advertising is greater than the cost of the ads. Typically, a ROAS of 4:1 or higher is considered excellent, meaning for every dollar spent on advertising, $4 in revenue is earned. A ROAS below 1:1 indicates that the ads are costing more than they are generating in revenue, signaling a need for reassessment of the advertising strategy. However, what constitutes a "good" ROAS can vary by industry and business model, so it's important to set benchmarks that align with your specific goals.

Example

You run an online home goods store called "Cozy Living". You launch three separate advertising campaigns to promote a new line of eco-friendly products on Google Ads, Facebook, and Pinterest. Each campaign has a different budget and target audience, and you want to determine which one is the most effective.

For the Google Ads campaign you spent $3,000 on Google Ads, which generated $12,000 in revenue. To calculate the ROAS, you divide the revenue by the advertising spend: 

ROAS = $12,000 / $3,000 = 4. This means that for every dollar spent on Google Ads, you earned $4 in revenue. This indicates a strong performance, showing that Google Ads effectively reached your target customers.

For the Facebook Ads campaign, you spent $2,000 and earned $7,000 in revenue. The ROAS is = $7,000 / $2,000 = 3.5. This campaign generated $3.50 for every dollar spent. While slightly lower than the Google Ads campaign, it still performed well and brought in significant revenue.

Finally, you spent $1,500 on Pinterest Ads, which resulted in $3,000 in revenue. The ROAS for this campaign is 3,000 / 1,500 = 2, meaning you earned $2 in revenue for every dollar spent. This campaign was the least effective of the three but still resulted in a positive return.

Result: By comparing the ROAS of these campaigns, you can see that the Google Ads campaign was the most successful, delivering the highest return on your advertising spend. Facebook Ads also performed well, though not quite as effectively as Google Ads. Pinterest Ads, while positive, offered the lowest return.

Armed with this information, you decide to allocate more of your advertising budget to Google and Facebook campaigns in the future, focusing on the channels that drive the highest returns. You also consider testing different strategies on Pinterest to improve its performance and better engage your target audience.

How to increase ROAS

1. Optimize Ad targeting: Refine your targeting to ensure your ads reach the most relevant audience. This can lead to higher conversion rates and improved ROAS.
2. Test and tweak: Continuously test different ad creatives, formats, and messaging to identify what works best. Use data-driven insights to refine your campaigns for better performance.
3. Monitor Ad spend: Keep a close eye on your advertising budget and adjust it based on the performance of each campaign. Allocate more resources to high-performing ads and scale back on those that underperform.
4. Leverage retargeting: Use retargeting strategies to re-engage users who have interacted with your brand but haven’t yet converted. Retargeting can be a cost-effective way to boost sales and ROAS.

4 The difference between ROI, ROMI and ROAS

To effectively evaluate business performance, it's important to understand the differences between ROI, ROMI, and ROAS, as each metric provides unique insights into investments, marketing, and advertising.

5 Key misunderstandings and pitfalls in ROI, ROMI, and ROAS

1. ROI provides a complete picture. Relying solely on ROI can overlook indirect benefits such as brand building and customer loyalty, which may not immediately translate into profit.
2. Higher spending improves ROMI. Increasing marketing spend without proper targeting and strategy can lead to diminishing returns, rather than improving ROMI.
3. High ROAS equals success. A high ROAS can be misleading if the ads attract low-quality leads that don’t convert into long-term customers.
4. Short-term focus. Focusing too much on immediate returns can cause businesses to neglect long-term strategies and investments that are crucial for sustainable growth.
5. Misalignment with business goals. Metrics that are not aligned with overall business objectives can lead to decisions that don’t support the company’s long-term success.
6. All metrics are equally important. Assuming that all metrics are equally important can lead to misinterpretation. Each metric serves a different purpose and should be used in the appropriate context to gain accurate insights.
7. ROAS alone determines ad effectiveness. Relying solely on ROAS without considering other factors like customer lifetime value and cost per acquisition can result in an incomplete understanding of ad performance.
8. ROMI always reflects immediate success. Expecting immediate success from marketing efforts can be misleading, as some strategies require time to yield significant returns and brand recognition.
9. Static market conditions. Assuming market conditions remain static can lead to inaccurate ROI, ROMI, and ROAS calculations, as external factors can significantly impact results.
10. Ignoring competitive dynamics. Failing to consider competitive actions and changes in consumer behavior can skew the interpretation of these metrics, resulting in less effective decision-making.

6 Conclusion

Understanding ROI, ROMI, and ROAS is crucial for businesses aiming to optimize their financial and marketing strategies. Each metric provides unique insights: ROI evaluates the overall profitability of investments, ROMI assesses the effectiveness of marketing efforts, and ROAS measures the efficiency of advertising campaigns. By using these metrics correctly, businesses can make informed decisions about where to allocate resources, enhance performance, and drive growth.

It is essential to recognize the common misconceptions and pitfalls associated with these metrics to avoid misinterpretation and ensure accurate analysis. Businesses should consider the broader context, including market conditions and long-term objectives, when analyzing these metrics.

By integrating ROI, ROMI, and ROAS into their decision-making processes, businesses can achieve a more comprehensive understanding of their performance and make strategic adjustments to improve profitability and sustainability in an ever-changing market environment.