Return on ad spend (ROAS)
Return on Ad Spend (ROAS) calculates how much revenue was generated from a specific ad or campaign.
What is ROAS?
ROAS is often expressed as a percentage and represents the revenue gained from each dollar spent on advertising.
App marketers can use ROAS to measure their user acquisition (UA) efforts. After the initial install they may want to measure 3-day ROAS, 7-day ROAS, 30-day ROAS etc. Each of these metrics will help app marketers understand how much users spent 3, 7, and 30 days post install, and in turn highlight which channels or campaigns delivered the highest value users.
Why does ROAS matter?
There are dozens of metrics available to marketers to help them understand and better optimize their campaigns. So the question is, what does ROAS bring to the table?
Well, at the end of the day ROAS is the most important metric for marketers. Even if a campaign delivered top quality users who generated significant revenue in the app, if you paid more than you gained from those users, the campaign cannot be considered a success.
Even a partial ROAS is a valuable indication for marketers, especially if predictive analytics are involved. For example, if an app knows that users who generate 50% or more of their cost by day 3 are highly likely to become profitable users by day 30. In this case, early campaign optimization can help ensure long term positive ROAS by doubling down or cutting underperforming ad sets, and / or creatives based on the above information.
How to calculate ROAS
To calculate ROAS you can use the following formula:
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).
There are of course cases of a negative ROAS, for example if you spent $100 on your ad and only generated $50 in revenues. In this case, your ROAS would be 50%. If you were to find you had a negative ROAS this would be a good time to reassess your creatives and marketing channels and see where the problem lies, and optimize accordingly.
ROAS vs. ROI
Both ROAS and ROI (Return on Investment) help a marketer understand if their campaign was successful or not, but that is 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 here is the 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 the success of a campaign.
ROAS vs. eCPA
eCPA is the effective cost per action and a measure of the actual results of a campaign from a cost perspective. For example, an advertiser spends $1,000 on their ad campaign and receives 200 actions. The eCPA would be $5.
As such, ROAS and eCPA are two different terms. While both provide a monetary evaluation of a campaign’s success, total generated revenue is not factored in the ‘actions’, only the number of occurrences.
If the ‘action’ was defined as an in-app purchase and the marketer knows that these 200 actions generated $1,500 in revenue, we could then find the ROAS by dividing 1,500 by 1,000 (150%).
Also, both ROAS and eCPA are on the list of the most important metrics of a campaign; if ROAS is underperforming and eCPA is not reaching its target (meaning the advertiser is paying more than they intended to pay for an action), it is very important to optimize as quickly as possible to ensure the campaign reaches its full potential.
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 is sometimes used as a measure of how successful a creative was in driving action (a click).
While ROAS and CTR both explore how successful an ad creative was, that is where the similarity ends. ROAS is the metric with the highest performance value, whereas CTR only provides indications of a campaign’s creative.
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.
Actually, that’s not true either. Good ROAS is positive ROAS. And it could take time, sometimes months, to drive a profit from a user/campaign.
But what is a good ROAS for one organization might be worrying for another, depending on ROAS targets.
For example, profit margins in a hyper casual gaming app are very low since ad revenue is often a few cents per view; therefore CPI 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.
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.
5 ways to improve your ROAS
A marketers goal is always to increase revenue and conversions. Let’s then 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 have been successful, and use that as a model for future campaigns.
2. Test and optimize
Achieving a good ROAS will be dependent on a number of factors and therefore it is important to test which campaigns, creatives, and channels deliver the best results and most valuable users. If you see that something isn’t working and delivering a low or negative ROAS then it’s time to either optimize and fix whatever isn’t working or stop the campaign altogether.
3. Lower the cost of your ad
It may seem obvious, but one way to get more return on your spend is to reduce your spend. You can do this by improving your quality score. A better quality score results in higher ranking ads and therefore a lower CPC.
Another way is to 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 will either just ignore your ad and diminish your CTR rate, or worse click on your ad, realise it is not relevant to them and move on, costing you money for the click and giving you nothing in return.
4. Re-engage high value users to increase revenue
Re-engagement is much cheaper than UA and even free if done on 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 are getting a good deal as well as being appreciated and valued users.
5. Use predictive analytics
Knowing how your most valuable users monetize throughout their lifetime using the app can be a game changer with ROAS optimization. If you are able to correlate early actions in the funnel with future monetization, you can significantly improve your ROAS. For example, if an app found that users who complete level 10 within the first 24 hours of a game are highly likely to make in-app purchases, they can leverage this data to optimize the campaign after 24 hours instead of waiting for more signals later in the funnel. Doing so would prevent budget waste and ensure revenue potential is met.
User acquisition (UA) toolkit for 2023
- ROAS is the most important metric for marketers. High value users don’t mean much if you paid more to acquire them than the amount they spent in-app.
- Good ROAS is dependent on your company, but certainly it has to be positive; remember that achieving positive ROAS in a campaign can take months
- Early indications of revenue will allow you to measure your partial ROAS to help you understand if you are in the right direction