How to Calculate ROI of Online Advertisement

Return on Investment (ROI)

Return on Investment (ROI) is a metric employed to gauge the profit derived from an advertising campaign.

Calculating ROI involves two primary methods. 

The first method entails: 

subtracting marketing costs from the total sales growth during the campaign period and then dividing the result by the marketing cost. 

Sales growth represents a positive increase in sales compared to prior periods, indicating a positive change or sales lift. 

For instance, 

with sales growth at $200,000 

and marketing costs at $55,000, 

ROI = (sales growth – marketing costs) /  marketing costs

the ROI is calculated as: (200,000 – 55,000) / 55,000, resulting in an ROI of 2.6. An ROI greater than 1 signifies profitability, with higher values indicating greater success. 

Customer Lifetime Value (LTV)


Another method to assess ROI involves the concept of customer lifetime value (LTV), denoting the average revenue generated per customer over a specific duration. Software analytics tools, such as Google Analytics 4, provide LTV reports for users acquired through various channels, aiding in monitoring customer behavior and campaign effectiveness. An increasing LTV trend signifies a rising ROI. 

Return on Ad Spend (ROAS)

Here we are talking about ROAS (Return on Ad Spend )which is also used to measure performance of online/digital advertising campaigns.

ROAS is a metric calculated by: Dividing revenue generated by (/) advertising spending. 

ROAS = Revenue Generated / Advertising Spending. 

Performance goals are aligned with broader marketing objectives, with ROAS targets for digital channels usually relative to an overall campaign ROAS across diverse media. 

For instance, a 5:1 ROAS marketing goal may yield channel-specific goals 

like 3:1 ROAS for search 


4:1 ROAS for display, 

contributing to the overall ROAS across all media.

When analyzing campaign analytics, determining when intervention is required is crucial. If ROAS falls short of the target, there are several considerations. Extending the campaign duration is one approach, recognizing that measuring conversions can be a fluctuating process affected by market variations. Evaluation of ROAS after a minimum of 50 conversions is advisable. Setting ROAS targets by product groups, rather than an overall ROAS, offers a more nuanced measurement. 

For instance, a clothing store aiming for a 4:1 overall ROAS can set varied targets for product groups like formal and casual wear. 

Assessing how the ROAS target was established is vital, ensuring it aligns with past campaigns and realistic margins. Adjusting automated bidding strategies, applicable only to automated campaigns, is a final option. Understanding ROAS as a performance metric is crucial, aiding in evaluating campaign success. With practice, measuring both marketing ROI and ROAS becomes an integral part of the job, serving as key metrics in marketing analytics.