Definition
Return on Ad Spend (ROAS) is a marketing metric that compares the sales generated by advertising to the corresponding advertising costs. It is used to compare the performance of ads, media channels, platforms, etc.
Depending on needs, the sales attributed to the ads can be specified in terms of incremental or marketing exposed sales. Likewise, the costs can be limited to the direct ad creation and media placement costs or can include other costs such as the salary of in-house and contracted personnel who manage the ad campaign, vendor costs, and affiliate costs. [1]
Return on Ad Spend (%) = Sales Attributable to Ads ($) / Cost of Ads ($)
iROAS (incremental return on ad spend) – In the early 2020s, a source of error was identified for some calculations of ROAS. Specifically, sales not attributable to the advertising were being included in the calculation, over-estimating the advertising’s contribution. For instance, this could occur when estimating ROAS for a web startup. Since there were no other sources of sales for a startup but the advertising campaign, it was reasonable to assume that all sales were driven by advertising exposure. Therefore, total sales were used in the ROAS calculation. As the website became better established, an increasing number of sales would derive from repeat purchases and third-party referrals (10 best lists come to mind.)
This now “standard” method of calculating ROAS over time increasingly overestimated the advertising contribution. To remedy this, the term iROAS was suggested to highlight that only the ‘incremental’ return from the specific advertising should be included in the sales term.
It must be noted, however, that when calculated correctly, ROAS and iROAS are identical metrics. [2]
References
- Common Language in Marketing Project, 2022
- Universal Marketing Dictionary Project, 2024.