Forget ROAS. It’s all about ROMI now.
Your ad spend is only a fraction of your campaign investment. To figure out the true ROI of your marketing efforts you need more than just 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. While visibility and engagement metrics (impressions, CTR, click rate) will help you gauge your reach, return on investment metrics (CPC, cost per conversion, ROAS or ROMI) will help you objectively determine the revenue contribution of your campaign.
Though, how objectively? ROAS, or Return on Ad Spend, is the ad networks’ preferred metric. It emphasizes the revenue created by the campaigns you run on them, 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, or ROMI, is rapidly gaining popularity as a more informative metric, which will give you actual insights to fuel your marketing optimization.
What is ROAS?
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 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. So, 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 ROMI?
Return on Marketing Investment (ROMI), on the other hand, is a subset ROI metric which doesn’t look at all the spend associated with your business, but rather at the spend associated with your marketing efforts. There are two common ways to calculate ROMI - with and without COGS (cost of goods sold), which lead to vastly different numbers. In this article we refer to COGS-inclusive ROMI, but your decision should be based on the specifics and complexities of your business. The important thing is to stick to your calculation method, making 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 using COGS, ROMI only takes into account the money you have in your pocket from sales. As in, 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 this in mind, to calculate ROMI, you divide the profits from your marketing campaign by the total cost of running that campaign.
Okay, 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, where the investment is long term and there’s no expectation of immediate returns. Having said that, ROMI still gives you a far more complete and accurate picture of how your marketing campaign performed.
To take the example above, 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.
Meanwhile, let’s say that the item you are selling is lip liner. Your $10,000 in revenue was made up of 1,000 units, sold at $10 each.
These 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 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.
… This means that 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 that work in practice?
This 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 their first campaign, the brand came up with a cool idea. Using Facebook ads that linked through to a longer YouTube video, they 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 120M paid ad impressions on Facebook and, during the three months of the campaign, there was a healthy spike in sales. However, this dwindled again once the campaign was over. This was bad news considering that their 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 this, they created an AI robot that target consumers could interact with online and expanded the campaign to take in TV ads, all over a 7 month period.
Four months after this 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 they’d simply fixated on their ROAS, the company 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 and 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 is, you need to be able to analyze this carefully for yourself, in order to optimize your spend and boost your marketing ROI over time. ROAS doesn’t let you do that… but ROMI can.
A version of this article previously appeared on MarketingProfs.