Measuring Returns

Advertising 101 for Writers: [B2] Measuring Returns

Welcome to our second lesson of the course “Advertising 101 for Writers“. During our last one, we talked about Prices and Rates (check it out if you haven’t). In this lesson, we will look at measuring returns.

In order to understand what follows, we need to have clarity on two basic definitions that are widely used:

  • Revenue: that is the money income deriving from your activities, for example, your book sales.
  • Profit: (also referred to as net profit) that is the difference between your revenue and your expenses.

Basic Measures of Returns

Let’s start by enumerating the list of metrics that are used to measure returns. These are often confusing and misused. We will go through why this confusion exists to understand when to use one or the other. The two main metrics used by advertisers when measuring returns are ROI and RoAS.

ROI (Return on Investment): ROI measures how much we get back for every dollar we spend in advertising. In a sense, it is a net metric because it subtracts the cost of advertising from the returns that this drives.

It is measured as: “ROI = (revenue – cost) * 100 / cost”.

    \[ ROI = \frac{(revenue - cost)}{cost} \times 100 \]

Briefly, if we have spent $1000 in advertising to earn $1200 in book sales, our ROI will be (1200 – 1000) * 100 / 1000 = 20%. This means we get back 20% of what we invest in advertising.

RoAS (Return on Ad Spend): RoAS is the ratio of revenue to advertising spend. Many advertising agencies (and also some of the popular tools) just get this wrong by calling it ROI.

We measure it as: “RoAS = revenue * 100 / cost”.

    \[ ROAS = \frac{revenue}{cost} \times 100 \]

Again, if we have spent $1000 in advertising to earn $1200 in book sales, our ROI will be 1200 * 100 / 1000 = 120%.

What’s the difference? Which one should I use?

If you talk with an advertising agent, they will say that RoAS assumes ads to be a necessary cost and it is a useful mechanism to measure the effectiveness of your ads. ROI instead doesn’t assume ads as necessary, considers advertising as an investment and gives you a broader perspective on whether you should use display ads or not.

In general, I would discourage you from using RoAS when evaluating your ads. This for many reasons, but, most of all, for the fact that when promoting your book, you are not trying to promote a large brand and so you are not trying to maximise your audience reach but rather to drive sales. ROI gives you a clearer perspective on what you are getting back from advertising. It also gives you a simpler way to see if you are wasting money (the ROI would be negative whereas RoAS is guaranteed to be always positive).

A better way to measure ROI

Given we are still trying to sell books here, we don’t have a large margin. Because of this, we should reconsider the ROI formula to use profit rather than revenue. If we consider every non-advertising cost as unavoidable and try to estimate the returns of our ads, we would use the following formula: “ROI = (profit – adCost) * 100 / adCost”.

    \[ ROI = \frac{(profit - adCost)}{adCost} \times 100 \]

In the formula, I am saying “adCost” rather than cost to be more explicit on the fact that these represent the expenses of advertising.

This gives a better perspective of how much money ads will drive in our pockets.

Using the example from before, let’s say that we have spent $1000 in advertising and made $1200 in sales of our book. Considering, for simplicity, that we have sold 200 copies each at $6 and that for each copy, we have spent $4 in production costs. Our resulting profit is 1200 – 800 = 400.

If we put this in our new formula: (400 – 1000) * 100 / 1000 = -60%.

This means that our ads are not being effective as we supposed before and that we are actually losing money.

Keep an eye on your break-even point

As you have seen, using profit gives us a more precise instrument when measuring returns. It’s important to ask yourself some questions when the ROI reaches zero. A zero ROI is your break-even point: it is the moment where advertising is not making nor losing any money.

Whenever your ROI moves below the break-even point, you should ask yourself the question: Is this worth it?

The answer is not necessarily “No”, because at times we might want to sacrifice some funds to reach new readers, but, nonetheless, we should be always aware of how we are spending our money.

Few things to keep in mind

  1. Bear in mind there is a difference between Revenue (Gross) and Profit (Net).
  2. Favour using ROI over RoAS and be aware that many agencies and tools tend to mix the names.
  3. It’s better to use profit in your ROI formula rather than revenue.
  4. Keep an eye open on your break-even point.

During this lesson, we learned about measuring returns. In the next lesson, we will learn how to use the concept of ROI to estimate the profit in more complex situations. For example, whenever we advertise a book series or a mailing list.

I hope you have enjoyed this article. If you have any comment, feel free to leave them below. If you enjoy my content and want to know whenever I publish a new article, subscribe to my mailing list.

Cover photo by GotCredit

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