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ROI is regularly mentioned in arbitrage cases and is used to evaluate the success of a campaign. For example, if for a month N funds were spent and M rubles were received, the ROI amounted to 300%. At first glance, it may seem to many that the effectiveness of 300% is great, and you need to continue draining traffic. However, in fact, ROI is not always unambiguous and can illustrate not only the effectiveness and return on investment of advertising campaigns, but also the return on investment, which is known as ROMI or ROAS. Therefore, it should be paid proper attention to.
In a nutshell, return on investment (ROI) is a metric used to evaluate the profitability of an investment, expressed as a percentage. However, arbitrageurs usually use Return on Ad Spend (ROAS) instead of ROI.
ROAS differs from ROI in that the calculation of this indicator takes into account, or does not take into account, the costs incurred by the enterprise for its maintenance. To calculate ROAS, we look at revenue in the direct sense, finding out whether the revenue generated was more than what was spent on advertising. The formula for this calculation is as follows:
As an example, we can take the situation when the arbitrator paid for promotion of 5000 rubles, and received in return 15 requests worth 700 rubles.
Actually, the formula ROAS = 15*700 / 5000 = 2.1
This means that the return on investment was 210%, as each ruble used brought 2.1 ₽ of total profit. Usually, when we talk about ROI, it is expressed as a percentage after multiplying the ratio by 100.
ROI is not completely accurate, as it gives an idea of advertising revenue versus expenses. It is the most useful way of assessing how advertising campaigns affect the monetary well-being of a business, either positively or negatively. The following equation can be used to calculate ROI:
In other words, with an identical illustration, ROI would be = (15×700 -5000) / 5000 × 100 = 110%. Unfortunately, this doesn't look at all like a 210% ROAS. There are still many people who can't tell the difference between these two metrics, despite the fact that understanding ROAS from ROI can stop your campaign from falling flat and losing money.
It's simple: if the ROAS is 200%, you get two rewards for every currency you spend, but on the other hand, with an ROAS of 50%, you'll only get back half a unit, in which case you'll have a deficit.
The ROAS approach estimates the effect within a single platform, but since consumers currently use advertising across multiple channels and the final purchase decision may be made through a different device or platform, this model may not be appropriate. On the other hand, ROI can provide insight into marketing investments.
The only difference between these two metrics is in their names. Their calculations are exactly the same. The confusion arose because ROI (Return On Investment) is a more comprehensive term, while ROMI is intended only for evaluating marketing investments, as it does not take into account such expenses as accounting costs, salaries, shipping costs, etc.
ROI may not be suitable for evaluating performance in all scenarios and is therefore not a universal method of determining performance.
Calculating ROI is certainly intriguing, but it is important to understand when and in what context to apply it.
Realizing the fundamental importance of accurate calculations is necessary to allocate budget in the most profitable way and not to invest money in fruitless campaigns. Nevertheless, one should keep in mind the imperfection of ROI indicators, as they do not take into account all the costs incurred during the campaign. However, assessing the rate of change remains an objective metric. Ultimately, one should strive for positive results and career success! ROMI - you can't beat it!