Many Australian SMEs focus heavily on Return on Ad Spend (ROAS) when evaluating marketing performance. While ROAS – the revenue generated for every dollar spent on advertising – seems straightforward, it often paints an incomplete, and potentially misleading, picture. We consistently find businesses are missing crucial profitability insights by relying solely on this metric. Return on Investment (ROI), on the other hand, delivers a far more accurate understanding of your marketing’s true impact.

The core difference lies in what each metric considers. ROAS only looks at revenue directly attributable to your ads. ROI, however, factors in all costs associated with acquiring a customer – not just ad spend. This includes things like marketing team salaries, software subscriptions, creative production, and even overhead costs allocated to marketing activities.

Here’s why this matters in practice:

• ROAS ignores crucial costs: A high ROAS might look fantastic, but if your cost of goods sold (COGS) is significant, or your customer acquisition costs beyond advertising are high, your actual profit margin could be slim.
• It favours short-term gains: ROAS often prioritises immediate revenue from ads, potentially overlooking longer-term brand building activities that contribute to overall profitability but aren’t directly tied to a specific campaign.
• Inaccurate channel comparison: Comparing ROAS across different marketing channels (like social media versus email) can be misleading. Some channels have inherently higher upfront costs than others. ROI levels the playing field.
• Hidden inefficiencies: A strong ROAS can mask inefficiencies within your marketing processes. If you’re spending excessively on creative or agency fees, ROI will expose this.

For example, imagine a campaign with a ROAS of 4:1. Sounds good, right? But if your COGS is 60% and your other marketing costs (beyond ad spend) are 20%, your actual ROI is significantly lower. Calculating ROI forces you to consider the full financial picture, revealing whether your marketing is genuinely driving profit.

We recommend Australian SMEs shift their focus from solely optimising ROAS to comprehensively analysing ROI. Start by meticulously tracking all marketing expenses, not just ad spend. Then, calculate your ROI for each campaign and channel. This will provide a clearer understanding of what’s truly working and where to allocate your marketing budget for maximum profitability. Don’t just chase revenue; chase profit.