What is ROI, ROAS and Conversion Value in digital marketing (or PPC).

Background:

In this article we discuss about ROI (return on investment), ROAS (return on advertisement spend) and conversion cost value of product or service in digital marketing or PPC advertisement. ROI is very important in terms of profit margin whether it is online or offline business.

Some of the questions are in your mind tickling that what does meaning of ROI & ROAS in general terms, so in the next topic we are evaluating some of the definitions & factor that affect the ROI & ROAS in digital & non-digital advertisement.

In non-digital marketing (like some: Print media, TV commercials, FM & Radios) there is so difficult to figure out what is the actual revenue or conversion cost we receiving through non-digital marketing. That’s why digital marketing is more scalable, robust, measurable, and effective in terms of revenue and conversion value of sold product and services then non-digital marketing strategies.

Before we move on next topic you need to know that there are some element that has to place on right way like:

• Set your conversion tracking code on your site (Google AdWords or Bing Ads).
• Set your conversion value if it’s a fixed or as dynamic where you can change value every time when conversion happen.
• And you have to know you margin percentage in order to calculate ROI.
• How much do you willing to pay for click in PPC or any digital payper-click platform.

If you are not familiar with conversion tracking code and static and dynamic value you can read this article first Click Here. But in this section we definitely explain all the related aspects of ROI & ROAS.

Ok without wasting so much time in differentiate between digital & non-digital marketing lets jump on to main topic discussion:

 

Definitions:

ROAS – Return on ads spend is how much revenue or money we receive from sold of goods & services divided by expenses of advertisement.

ROI – Return on investment is how much money or revenue we receive from sold of goods & services divide by the cost of goods & services.

Conversion value – conversion value is amount of value you receive for making any user to become customer or client after goods & services being sold on your website. Conversion value may be you margin value or maybe you sold value that is consider as revenue form sold of good

Profit margin – Margin of any good & service is amount which you receive in your pocket after all expenses deduction from revenue.

For example: assume your margin is 40% for product with selling price is Rs.120, Then following equation can explain that Rs.48 is profit margin of product sold in Rs.120.

 

 

Mathematically Calculation of ROAS & ROI:

1. ROAS (Return on ads spend) formula:

 

 

Where:

Total revenue - means conversion value for online goods & service sales.

Cost of Ads – means total amount of money you have spent on digital or non-digital Advertisement.

 

Example: let’s suppose your

Conversion value / revenue / sales of goods sold = Rs.1, 50,000

Cost of Ads spend = Rs.50, 000

Let’s put all the values in ROAS formula

 

 

In this answer 3 is times factor that is simply converted into percentage by simply multiplying by 100, now the 300% is the factor that we got called profit factor if it goes greater or above then 100%.

In simple terms if you receiving revenue is Rs.1, 50,000 after spending Rs.50, 000 in Ads then you profit margin is Rs.1, 00,000 or simply 200%.

Or

In simple terms if you receiving revenue is Rs.3 after spending Rs.1 then you gross profit margin is Rs.2 or simply 200%.

Note: ROAS is only calculate gross profit of goods not actual profit in good sold, actual profit will comes when cost of good deducted from revenue. That’s why for accurate calculation we will use ROI.

 

2. ROI (Return on investment) formula:

 

 

Where:

Total revenue - means conversion value for online goods & service sales.

Cost of goods – revenue x cost of goods percentage.

Cost of goods percentage = 100% – profit margin.

Cost of Ads – means total amount of money you have spent on digital or non-digital Advertisement.

 

Example: let’s suppose your

Conversion value / revenue / sales of goods sold = Rs.1, 50,000

Profit margin = 60%

Cost of goods percentage = 100% – 60% = 40%

Cost of goods = (1,50,000 – 40/100) = Rs.60,000

Cost of Ads spend = Rs.50, 000

Let’s put all the values in ROI formula

 

 

In this answer 1.8 is times factor that is simply converted into percentage by simply multiplying by 100, now the 180% is the factor that we got called net profit factor if it goes greater or above the 100%.

In simple terms if you receiving revenue is Rs.1.80 after spending Rs.1 then you net profit margin is Rs.0.80 or simply 80%.

 

Conclusion of ROI:

• If your ROI is greater or above then 100% then you are in profit.
• If your ROI is equal to 100% then you on edge of no profit or loss.
• If your ROI is less or below then 100% then you in loss.

Initially if you in less then 100% ROI it is sometime good because you are investing the money in your business that definitely be increase or greater then 100% in near future.

 

Profit margin break-even point:

Let’s suppose your profit margin is 60% as like above example, than

1/0.6 = 1.66 or 166% (break-even point of margin)

166% > 180% that simply prove that you are in profit.

 

Conclusion:

In this section we talked about ROI & ROAS for calculating profit based on your profit margin. ROI is best technique to find exact profitable margin for goods & services. In the very next article you can learn profitable bidding strategies based on conversion value per click, till then good day, have a safe & peaceful life.

If you want to get our Digital Marketing services you can choose one of these plan mantion in following service link Digital Marketing / PPC Plans.

 

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