In the hospitality industry, Return on Investment (ROI) and Return on Advertising Spend (ROAS) are two key metrics that hoteliers use to measure the success of their marketing efforts and overall business performance. However, it’s essential to understand that these metrics serve different purposes and provide further information. In this post, we’ll take a closer look at the differences between ROI and ROAS and how they can be used to make informed decisions about marketing strategies and investments.
Return on Investment (ROI) is a financial metric that measures the return on the investment made in a marketing campaign or overall business operation. It is calculated by dividing the profit made from the acquisition by the total cost of the investment, expressed as a percentage. For example, if a hotel invested $100,000 in a marketing campaign and generated $120,000 in profit, the ROI would be 20%.
ROI is a crucial metric for hoteliers because it shows how well they use their resources and how much they get in return. A high ROI means that the hotel generates more profit than the amount invested, and a low ROI indicates that the investment may need to be more effective. In the hospitality industry, ROI is often used to evaluate the success of overall business operations, including advertising campaigns, product launches, and promotions.
On the other hand, Return on Advertising Spend (ROAS) measures the return generated from the advertising spend. It is calculated by dividing the revenue generated from the advertising spend by the total cost of the advertising, expressed as a percentage. For example, if a hotel spent $50,000 on advertising and generated $100,000 in revenue, the ROAS would be 200%.
ROAS is a crucial metric for hoteliers when it comes to evaluating the effectiveness of their advertising campaigns. A high ROAS indicates that the hotel is getting more revenue in return for every dollar spent on advertising, while a low ROAS suggests that the advertising spend may need to be more effective. In the hospitality industry, ROAS is often used to evaluate the success of specific marketing campaigns, such as email marketing, social media advertising, and search engine optimization.
It’s important to note that while ROI and ROAS are related, they measure different aspects of business performance. ROI measures the overall efficiency of business operations, while ROAS focuses specifically on the effectiveness of advertising campaigns. ROI considers all the costs involved in running a hotel, including the cost of goods sold, overhead expenses, and advertising costs. At the same time, ROAS only considers the cost of advertising.
For example, consider a hotel that spent $100,000 on advertising, $200,000 on overhead expenses, and $300,000 on the cost of goods sold while generating $500,000 in revenue. The ROI would be calculated as follows:
ROI = (Revenue – (Advertising + Overhead + Cost of Goods Sold)) / (Advertising + Overhead + Cost of Goods Sold)
ROI = (500,000 – (100,000 + 200,000 + 300,000)) / (100,000 + 200,000 + 300,000)
ROI = (500,000 – 600,000) / 600,000
ROI = -0.17, or -17%
In this example, the hotel has a negative ROI, indicating that the overall business operations are inefficient and that improvements are necessary. However, the ROAS would be calculated as follows:
ROAS = Revenue / Advertising
ROAS = 500,000 / 100,000
ROAS = 5
In this example, the hotel has a ROAS of 5, indicating that the hotel is generating $5 in revenue for every $1 spent on advertising. This suggests that the advertising campaigns are effective and develop a positive investment return.
In conclusion, ROI and ROAS are essential metrics that hoteliers should understand and use to make informed decisions about their marketing strategies and investments. While ROI provides a snapshot of the overall efficiency of the business operations, ROAS focuses specifically on the effectiveness of advertising campaigns. Both metrics are complementary and can be used together to comprehensively understand the hotel’s financial performance and make data-driven decisions.
In the hospitality industry, it’s crucial to keep track of both ROI and ROAS to measure the success of marketing efforts and overall business performance. By continually monitoring and optimizing these metrics, hoteliers can ensure that their investments are paying off and that their marketing campaigns effectively drive revenue and generate profits.
At ArdanMarketing, we help hospitality-oriented businesses grow their direct bookings via digital marketing strategies like the one above to grow a new guest base and share your business’s message with the world. Contact us today so you, too, can start seeing success in digital marketing.