What Is ROAS?
To calculate ROAS, mobile marketers must look at the revenue a marketing activity generates in relation to its costs. Before you launch an advertising campaign, you should always establish a target ROAS.
- Look at return on ad spend as the actual profit achieved per advertising spend.
- Establish a target ROAS before launching a campaign.
- Improve your ROAS by focusing on two variables: maximizing your revenue or reducing your advertising costs.
Why Is Return On Ad Spend Important?
If you are an app developer or mobile marketer, you have probably heard of the term “ROAS.” But what is it exactly? Is it something you should be tracking, along with click-through rates and conversion rates?
ROAS is the leading KPI that shows how much money your advertising is generating. It also helps you forecast whether your efforts are on the right track. If you don’t follow your return on ad spend, you won’t know whether your advertising investment is paying off or if you need to make changes.
Return On Ad Spend Example
What is a good ROAS or return on investment (ROI)? The answer has to take into account your business model and the costs associated with developing your app. This will enable you to understand the impact of every dollar spent.
Let’s look at an example. Imagine you are an app developer, and you decide that your app is not yet attracting enough new users.
You decide to launch an ad campaign to acquire new users. What ROAS do you need to make the ads worth the investment?
If a recent advertising campaign brought in $10,000 after spending $2,000 on advertising, that’s a return of $8,000 or 500% on that investment. This is often stated as a ratio, which in this case would be 5:1. For every dollar spent on advertising, five dollars in revenue was generated.
How Is ROAS Calculated?
Return on advertising spend is a marketing metric that measures the effectiveness of a digital advertising campaign. Calculating the ROAS is simple, take the revenue generated by your advertising activity and divide it by the cost of that advertising activity.
ROAS = Revenue generated by channel or campaign ÷ the spend of the channel or campaign (advertising cost)
The ROAS is used to calculate the revenue of a particular advertising campaign. It takes into account only the advertising costs and provides an overview of the success of a particular ad campaign in order to give you action plans for continued growth.
Calculating ROAS to Invest in the Right Marketing Channel
In mobile marketing, user acquisition managers use the ROAS calculation to forecast their marketing efforts to ensure that their on track. This is why Media Buyers tend to evaluate ROAS in a cohorted view for D3, D7, D14, and D30. By evaluating how the performance appears on each cohorted day, marketers can then make calculated decisions into which channels to invest more in, continue investing in, or reduce their investment.
Often, after the third or seventh day, advertisers realize that the cohort is not maturing in the right way. Consequently, many advertisers pause the campaign or reduce the cost per install (CPI). On the other hand, they also see that they are getting good results with campaign A. Therefore, they decide that they want more users from this channel and increase the bids for the campaign to get more users.
What’s a Good ROAS?
A ROAS can be considered reasonable by putting it in perspective of 3 criteria:
- The generated margin
- Operating or marketing campaign expenses
- The general health of the company
Although there isn’t a one-size-fits-all answer, there is a standard criterion for estimating a good ROAS, as mentioned before. It must approach or exceed a ratio of 4:1 ($4 in revenue for $1 in advertising expenditure). If your ROAS is 5:1 or higher, things are working pretty well.
It also varies depending on the size of the business: cash-strapped indie gaming studios may need higher margins, while public mobile gaming companies committed to growing may afford higher advertising costs.
How to Improve Your ROAS
Let’s keep things simple; only two numerical variables can help you improve your ROAS: maximize your revenue or reduce your advertising costs.
Maximize Your Revenue by Optimizing Your Advertising Spending
- One way to optimize your ad spend is to segment campaigns by user demographics: adjoe does this by focusing on user profiles. By seeing which user demographics perform better than others, you can create targeted campaigns. For example, a match-3 app knows that female users under 30 tend to make fewer in-app purchases (IAPs) than older female users. To improve campaign performance, a separate campaign can be created for female users under 30 with a lower CPI to more effectively engage users. This way, marketers can optimize the CPI for older female users to reach even more of their target audience.
- Another way is to optimize performance by using post-install events: Advertisers are asked to submit their post-install events, which is an event passed to adjoe from the game developer via their mobile measurement partner (MMP), indicating if a user has made a purchase or completed a level. This allows adjoe to look at the users various characteristics to find better patterns in which users are more engaged. Post install events help account managers better optimize an advertiser’s campaign strategy to maximize their ROAS.
- Finally, increase CPI to reach more engaged users: Campaigns are distributed according to eCPMs. One way to quickly increase the visibility of a campaign is to increase the CPI to help improve their campaigns ranking. This often results in advertisers engaging with higher-quality users as they are connecting with users first.
Reduce the Cost of Your Advertisements and Increase Your Return on Investment
The second variable in the ROAS equation is to reduce the cost of all of your campaigns in order to get quality installs at a lower price.
Therefore, by simply reducing the CPI of an advertising campaign, you can increase your ROAS.
Alternatively, if you know that a particular user profile is not performing well on your app, it can make sense to exclude those users from a particular campaign and create an outlier campaign for those users at a lower price.
Exploring the Benefits of ROAS
Your ROAS should be important to your team and your business for several reasons, including the following:
- Analyze the average performance and financial return of your advertising campaigns
- Obtain accurate data to support ad spend increases, campaign budget changes, investing in the right advertising channel, and more
- Determine the most valuable and best-performing ad campaigns
- Generate a benchmark average for your ads to use against future calculations
All in all, calculating your ROAS provides valuable insights into the performance and quality of your advertising campaign.
It provides you with valuable and relevant data that you can use to optimize your ad spend. The only downside is the need for reliable data. If you don’t use the formula and just hazard a guess at the performance of your ad campaigns, it becomes very easy to squander your ad budget and decrease the number of leads and sales from advertising.
ROAS is undoubtedly one of the best metrics for determining whether your online marketing is working to increase your income. It is relatively easy to calculate. The results obtained, especially when used in tandem with adjoe strategies, can help you transform a business barely reaching the break-even point into one with extremely profitable digital marketing campaigns. To sum up, ROAS helps mobile marketing companies evaluate which methods work and how they can improve future advertising efforts.
FAQs about ROAS
To work out your ROAS, all you need to do is to divide your total revenue by the costs associated with your marketing activity.
ROAS is an acronym that stands for return on ad spend.
A good ROAS ratio varies depending on the size and needs of your business, but most marketing analysts agree that 1:4 or 1:5 is the ideal ROAS.
If your total monthly sales are valued at $1,000, and you invested $200 advertising, your ROAS would be calculated as $1,000 / $200 = 5.
Return on ad spend (ROAS) looks at revenue, not profit, and takes into account only direct spend, not other costs associated with a marketing campaign. ROAS is the best metric to determine if your ads are effectively generating impressions, clicks, and revenue. However, unlike ROI, it says nothing about whether your paid advertising is actually profitable for the business. Return on investment (ROI), on the other hand, looks at the total investment, including staff, tools, and other expenses.