In one line
Marketing ROI is the extra gross profit a campaign earned minus what it cost, divided by what it cost: (incremental gross profit − spend) ÷ spend. ROAS, return on ad spend, divides extra revenue by spend instead, so it leaves out the cost of making what you sold.
What it does
- Count only incremental sales, the ones the spend caused, against what would have happened without it: a test, a mix model or a like-for-like baseline.
- ROAS = incremental revenue ÷ spend. It is quick and ad platforms report it, but revenue is not profit: at a 40% gross margin, a ROAS of 2.5 only just pays back the spend.
- Gross profit per €1 = incremental gross profit ÷ spend. It breaks even at €1 (lesson 9).
- ROI = (incremental gross profit − spend) ÷ spend, which is gross profit per €1 minus 1. It breaks even at 0%: €1.30 back per €1 is a 30% ROI.
- Choose the horizon before you calculate. Brand media keeps returning for years, so a one-quarter ROI understates it.
Business and brand
Impact on the businessP&L, cash, share price
- A ROAS above 1 can still lose money: only the margin on those sales repays the spend.
- Some teams work out ROI on revenue, (revenue − spend) ÷ spend. That ignores the cost of goods, overstates the return and is a common reason marketing and finance disagree.
- Average ROI says whether past spend paid; the next euro's return (lesson 8) says whether to spend more.
Impact on the brandMemory, loyalty, pricing power
- Brand media looks weakest on in-quarter ROAS and strongest over two or three years (Binet and Field, 2013).
- Last-click ROAS credits the ad that came last, including for sales that would have happened anyway.
- An ROI that leaves out pricing power misses part of what brand building returns.
Try it
Work out ROAS and ROI
Add extra spend to brand media or activation for one quarter. The engine follows the next two years; the table works through ROAS, gross profit per €1 and ROI at the horizon you pick.
| Extra spend | 0.56 | |
|---|---|---|
| Incremental net sales | +0.80 | |
| ROAS | 0.80 ÷ 0.56 | 1.42 |
| Incremental gross profit | +0.44 | |
| Gross profit per €1 | 0.44 ÷ 0.56 | €0.79 |
| ROI | (0.44 − 0.56) ÷ 0.56 | −21% |
Each line is per €1 spent, added up from the quarter of the spend. Gross profit breaks even at €1 per €1 (an ROI of 0%); ROAS has no fixed break-even, because it leaves out the cost of goods.
Notice: Over the quarter, ROAS is 1.42 and ROI is −21%. A ROAS above 1 and still a loss: revenue is not profit. Activation's return arrives mostly in the quarter it runs.
Runs Countermove's market engine: the reference soft-drinks market, three brands, rivals holding their plans so only your change moves the result.
Sources
- Farris, Bendle, Pfeifer & Reibstein (2010), Marketing Metrics, Wharton School Publishing: return on marketing investment
- Lenskold (2003), Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability, McGraw-Hill
- Binet & Field (2013), The Long and the Short of It, IPA