Return on ad spend (ROAS)
What is ROAS?
ROAS is short for return on ad spend. It is a metric that helps app marketers understand which campaigns and ads are working (and which aren’t) by measuring how much revenue was earned in comparison to how much budget was spent.
ROAS is typically expressed as a ratio and the higher the ratio, the better the campaign performed.
So let’s say you invested $1,500 on ad spend for a campaign which resulted in $6,000 in revenue for your app – your ROAS would be 4:1 meaning for every dollar of ad spend, you made $4 in revenue. The calculation for this would look like the following:
$6,000 (revenue) / $1,500 (ad spend) = $4 or 4:1 (ROAS)
Having a low or high return on ad spend is often a good indicator of overall campaign performance and profitability and helps with making decisions around campaign spend and media source diversification.
In short, ROAS is kind of like ROI but specifically for campaigns driving traffic to mobile apps.
Why does ROAS matter?
ROAS is important because it helps answer the very basic (and essential) question “are my app marketing efforts actually working?” and guides decision making around where to invest more budget, and where to scale back.
For example, if you ran a campaign that delivered top-quality users who generated significant revenue in your app, but you actually ended up paying more than you gained from those users, that campaign can’t be considered a success – and that’s exactly what ROAS helps you determine.
It’s good to look at ROAS on a few different levels, from the birds eye view of advertising budget and platform-specific campaigns down to a single campaign, ad set, ad, and even creative depending on what types of insights you are hoping to extract.
Side note: Even a partial ROAS can be really valuable, especially if predictive analytics are involved. For example, let’s say you find that users who generate 50% or more of their cost by Day 3 are highly likely to become profitable users by Day 30. You can use this insight to cut off underperforming ad sets to ensure your ROAS stays positive.
However, while ROAS is a powerful metric on its own, it doesn’t tell the full story and to truly understand performance, you need to look at metrics like CPA, ARPU, and LTV as well.
All of these metrics combined will help you make better decisions on future budget, marketing strategy, and even your product roadmap.
Luckily, ROAS is easy to calculate — just use this formula:
The result is expressed as a percentage. For example, if you spend $1,000 on an ad campaign and you make $2,000 in profit, your ROAS would be 200% (100% is the break-even point — more on this later).
Of course, you could end up with a negative ROAS. For example, if you spent $100 on your ad and only generated $50 in revenues, your ROAS would be 50%.
A negative ROAS means it’s time to reassess your creatives and marketing channels to discover where the problem lies, and optimize accordingly.
We’ve covered positive and negative ROAS, but there’s another term you should know. Break-even ROAS is the point at which you cover the costs of your advertising: it hasn’t made you a profit, but it hasn’t lost you money either.
Break-even ROAS is a helpful benchmark to keep your ad spending on track, and in some cases it might be all you need to aim for. If you’re running an awareness campaign, for example, you wouldn’t expect ads to generate huge sales. But if you’re advertising to boost revenue, you may set a higher target.
You can use the following formula to calculate your break-even ROAS, expressed as a percentage:
Break-even ROAS = 1 / average profit margin %
(To calculate your average profit margin, take your average order value and subtract your average order costs. Then turn that into a percentage:
Average profit margin % = average profit margin / average order value x 100.)
Let’s say your app costs on average $3 per customer to produce, and you sell it for $5 — you’re making an average profit of $2 on each sale.
Your average profit margin is 2 / 5 x 100 = 40%.
Then, your break-even ROAS is 1 / 40% = 250%.
That’s the level at which your ad campaign pays for itself.
ROAS vs other metrics
Do you know your ROAS from your ROI? With so many marketing metrics available, and a whole alphabet of acronyms being tossed around, it’s easy to get confused. Let’s cut through the jargon to find out how the terms differ, and how they work together.
ROAS vs ROI
Both ROAS and ROI (return on investment) help you understand if your campaign was successful or not, but that’s where the similarities end.
ROI first calculates the total cost of the advertising campaign. That includes not just the cost of the ad itself, but any other resources involved such as IT, software costs, design, and distribution. It then looks at the profit and assesses the overall return on investment for the campaign.
The difference is that ROAS focuses purely on the profit generated from direct spend on an ad campaign. It doesn’t factor in the additional costs, only the cost of placing the ad and how much money you generated as a direct result.
Whereas ROI is used broadly across businesses and functions, ROAS is a pure marketing term and the foundation for understanding your campaign’s success.
ROAS vs CAC
Your customer acquisition cost (CAC) shows what it costs you to acquire a new paying customer. You calculate it by dividing your total campaign spend by your number of paying customers.
For example, if you spent $2000 on a campaign and gained 200 customers, your CAC would be $10 per customer.
CAC and ROAS both measure the results of your spending, but CAC is based on the number of customers you’ve acquired — whether they turn out to be valuable or not. With ROAS, you can see how much revenue those customers have brought you.
Looking at ROAS can help you make sure you’re acquiring valuable customers, and focus your efforts in the right places.
ROAS vs. eCPA
eCPA is the effective cost per action, and measures the actual results of a campaign from a cost perspective. For example, if you spend $1,000 on an ad campaign and receive 200 actions (such as clicks), your eCPA is $5.
While ROAS and eCPA both provide a monetary evaluation of a campaign’s success, total generated revenue is not factored into the ‘actions’, only the number of occurrences.
If the ‘action’ was defined as an in-app purchase, and you know these 200 actions generated $1,500 in revenue, you could find the ROAS by dividing 1,500 by 1,000 (150%).
eCPA should be up there with ROAS on your list of key campaign metrics. If your ROAS is underperforming and your eCPA is below target (meaning you’re paying more than you intended to pay for an action), you need to optimize as quickly as possible to get your campaign back on track.
ROAS vs. CTR
CTR stands for click through rate and is calculated by dividing the number of clicks by the number of impressions served.
Since a high CTR is a good indicator that your ad resonated with the audience, it’s sometimes used as a measure of how successful a creative was in driving action (a click).
CTR differs from ROAS because it only provides indications of a campaign’s creative — not the overall campaign performance.
What are the pros and cons of using ROAS?
ROAS is clearly a useful metric, but it’s not perfect. Let’s dig a bit deeper into the positives and negatives.
Advantages of using ROAS
Staying on top of your ROAS can have big benefits for your marketing campaigns. Here are some of the ways it can help you:
- Choose the best channel. Most campaigns use multiple channels, such as email, social media, and out-of-home. By measuring ROAS across all of your channels, you can see which give you the most bang for your buck — allowing you to focus on those, and ditch any that are draining your budget for little reward.
- Optimize your ads. By comparing ROAS across different ad creatives, you can identify which words and images resonate most with your audience. Then, give them more of what they like.
- Make reporting easy. A lot of businesses like ROAS because of its simplicity: ads go out, money comes in. It’s a quick snapshot that’s simple to explain, even to non-marketers.
- Take out the guesswork. Once you see what works and what doesn’t, you can use that insight to shape future marketing strategies and campaigns. Planning smarter will save you money and bring results faster. Plus, it’s easier to justify your ideas to management when you have the data to back them up.
One caveat: just because something has worked in the past, doesn’t mean it always will! So, while ROAS is a useful guide to campaign performance, it’s not a case of one-and-done — you should always keep testing and measuring.
Limitations of using ROAS
Of course, no metric by itself is a silver bullet — even one as powerful as ROAS has its drawbacks. Here are a few you should be aware of.
- It’s focused on the short term. Sure, you can set the timescale for which you want to measure ROAS, but it tends to be relatively short. That’s because you’re measuring behavior that can be directly linked to a specific ad. To understand your revenue over the longer term, you need to look at customer lifetime value (LTV).
- You don’t see the bigger picture. Your ads don’t exist in a vacuum: it may be a Facebook ad that someone ultimately clicks on, but that might be because they’ve previously seen a poster, read a review, or been nudged by a friend. Or maybe they already know and like your brand. Advertising is just one part of the marketing mix, making it hard to prove that returns are entirely due to spending on one ad.
- It doesn’t show volume. You can get a positive ROAS with a relatively small number of customers. Perhaps you just ran a very cheap campaign, so your revenue looks high in comparison. But how much higher could it be if you’d succeeded in attracting more customers?
Finally, it’s worth considering how privacy rules affect ROAS. Heightened privacy in the post-iOS14 era has certainly made it harder to get a handle on this metric: data has become more fragmented across networks, making attribution trickier, and accuracy isn’t guaranteed either.
For a deeper dive into ROAS privacy issues and solutions, check out our blog on the challenges of measuring ROAS in a privacy-centric world.
What’s a good ROAS?
This is an age-old question asked by marketers the world over. The honest answer is that there is no answer.
The main thing to remember is that good ROAS is positive ROAS. And it could take time, sometimes months, to drive a profit from a user or campaign.
But what is a good ROAS for one organization might be worrying for another, depending on their targets.
For example, profit margins in a hyper casual gaming app are very low, since ad revenue is often just a few cents per view. This means CPI (cost per install) is cheaper and scale is the name of the game to drive profitability.
A subscription-based app like Netflix or Spotify, on the other hand, can generate higher margins thanks to recurring subscription revenue, despite relatively high acquisition costs.
Good ROAS also varies according to your advertising platform. For example, research from Databox shows that companies typically achieve a return of 6x to 10x (in other words, 600% to 1000%) on Facebook ads. For Google Ads, on the other hand, average ROAS is around 200%.
These numbers might sound impressive, but remember, they’re just averages. They’re not broken down by industry, company size, or audience, so don’t panic if your own results look different!
What is a target ROAS?
Target ROAS is a bidding strategy whose aim is to hit a specified (user) value. That means you set a target order value for each dollar you spend on your campaign.
Unlike with other Adword bidding campaigns, where Google controls the bid through algorithms and automated processes, target ROAS requires its own bid strategy as there is no standard version.
For some verticals, targeted ROAS can be a useful tool: for example eCommerce, where the goal is to drive in-app purchases. However, be aware that targeted ROAS requires a minimum number of conversions (Google recommends at least 15 conversions in the last 30 days in the same campaign). Without these it will be difficult for Google to hit the desired target.
Nine ways to improve your ROAS
A marketer’s goal is always to increase revenue and conversions. So let’s look at a few ways you can improve your ROAS.
1. Set benchmarks
To know what your target should be, you first need to understand what qualifies as good ROAS and set that as a benchmark. Knowing the baseline for each campaign and channel can help highlight where you’ve been successful, and serve as a model for future campaigns.
2. Test and learn
Achieving a good ROAS will be dependent on a number of factors, so it’s important to test which campaigns, creatives, and channels deliver the best results and most valuable users. Use A/B testing to experiment with different creatives, placements and targeting strategies.
3. Optimize your landing pages
If your ads are getting plenty of clicks, but your ROAS remains stubbornly low, look closely at where the ads are taking people. Is your landing page clear and engaging? Is the look and feel aligned with the ad? Does the page load quickly? Are calls to action clear?
There are lots of tweaks you can make to keep users moving smoothly through the purchasing journey.
4. Lower the cost of your ad
It may seem obvious, but one way to get more return on your spend is to reduce that spend. You can do this by improving your quality score. A better quality score results in higher ranking ads and therefore a lower cost per click (CPC).
Keywords impact cost too. Rather than going for the most popular terms, look for long-tail keywords or those more targeted to your niche.
You can also introduce negative keywords, which help exclude users who may be looking for a similar item to what you’re advertising but not that exact item.
For example, your shopping app has a winter deal for scarves. You can exclude users who are searching for winter gloves, as they’re likely to ignore your ad and diminish your CTR. Worse, they might click on your ad, realize it’s not relevant to them and move on, costing you money for the click and giving you nothing in return.
5. Know your audience
Carry out robust customer research to understand where your ideal customers are, when they’re online, and what they’re interested in. If you know they’re parents who follow food content on Facebook, for example, there’s a good chance they’ll be interested in your family recipe app.
By carefully aligning your message to your audience, you’ll drive higher conversions and stop wasting money on the wrong channels.
6. Re-engage high value users to increase revenue
Re-engagement is much cheaper than UA, and can even be free if you use your owned channels. If you have a cohort of users who have delivered a high ROAS then it’s important to re-engage and encourage them to repurchase.
One way to do this is through a limited time offer. That way they feel as though they’re getting a good deal as well as being appreciated and valued users.
7. Bid smarter
Experiment with different bidding strategies to find the most cost-effective approach. You may find you save money by adjusting your maximum bid, using automated bidding, or setting different bids for desktop and mobile.
8. Use predictive analytics
Knowing how your most valuable users monetize throughout their lifetime using your app can be a game changer with ROAS optimization. If you can correlate early actions in the funnel with future monetization, you can significantly improve your ROAS.
For example, if you find that users who complete level 10 of your game within the first 24 hours of play are highly likely to make in-app purchases, you can use this data to optimize the campaign after 24 hours, instead of waiting for more signals later in the funnel. That way, you can cut waste and meet your revenue targets.
9. See the bigger picture
If customers are dropping out on their way to the checkout, investigate why. Is your price too high? Are you asking for too much information? Is the process confusing? Look beyond advertising to see how you can optimize the entire customer journey.
- ROAS is among the most important metrics for marketers. High-value users don’t mean much if you paid more to acquire them than the amount they spent in-app.
- But ROAS can’t tell you everything – use it alongside other metrics including ROI, CAC, CTR and eCPA.
- Good ROAS is dependent on your company and the platform you’re using, but it should be positive. Remember that achieving positive ROAS in a campaign can take months.
- Break-even ROAS is a useful benchmark to ensure you cover the costs of your advertising activity.
- Early indications of revenue will allow you to measure your partial ROAS to help you understand if you’re heading in the right direction, and how you could optimize your campaign.
- To improve your ROAS, you need engaging content and a seamless customer journey. Also, consider ways to cut advertising costs, for example by refining your bidding and keyword strategies.