What is ROAS?

What is ROAS?

ROAS or Return on Ad spend is revenue based marketing metric for Online Advertisers, which measures the efficiency of a digital advertising campaign. ROAS helps an online business determine what are the methods are working and how you can improve in future advertising efforts.

In Simple words, it answers the fundamental question, which marketing channel is performing at what level to get into profitability because Marketing is all about Investing in the right platform and getting desired the output.

How to do the ROAS Calculation?

The Formula to Calculate ROAS is Very Simple, It is as follows

Revenue/Cost = ROAS

For Example: If I spend $20,000 on paid search in the month of August and Generated $60,000 as revenue, then my ROAS is $3.

ROAS=$60,000/$20000=$3.

Why does ROAS Matters?

ROAS matters significantly as it evaluates the performance of ad Campaign and how they contribute to an Online store’s overall earning (Bottom line), Observation and finding of ROAS across all campaign help in future budgets, Marketing plan and formulation of strategy.

By the Findings and observation of ROAS on regular basis, E-commerce companies make the decision where to invest their Ad Budget and how to make it efficient day by day.

What is a good ROAS for your Google Ad Campaigns?

Good ROAS is influenced by Operating expenses, Profit Margin and the overall performance of the business, there is no definite answer for Good ROAS. Few Businesses are considered outstanding for maintaining $4:1, Others would require $10:1 to maintain profitability.

Having a high margin indicates that the business can survive a low ROAS, whereas Having low margin indicates that the business should maintain low advertising cost.

Difference between ROAS and ROI

Return on Investment (ROI) measures the profit generated by ads relative to the cost of those ads. In comparison, Return on Ad Spend (ROAS)  measures gross revenue generated for every dollar spent on advertising. It is an advertiser-centric metric that benchmarks the effectiveness of online advertising campaigns.

ROAS = Return On Ad Spend = Revenue / Ad Spend

With this KPI, you are measuring if your paid acquisition campaigns are yeilding a positive return, ie: bringing back more revenue than you've spent. ROAS is expressed a ratio (2:1) or percentage (200%).

Wording: ROAS, DROAS, ROI, eROAS, LTV:CAC...

ROAS is the equivalent of a metric investors are keeping a very close look on: "LTV:CAC ratio" (hint: they're going to look for 3+).
While wording can vary from a company to another, I personally use "ROAS" to talk about the direct measurable effect of campaigns, without factoring virality, organic uplift and other organic traffic. This is sometimes called "Direct ROAS" or "Direct ROI".
"ROI", in contrast, would be used to discuss "Blended ROI" which includes all revenue (tracked & hidden virality, organic uplift, organic baseline) and measures the overall profitability of an app for a given timeframe, not of its sole UA campaigns. Some use the term eROAS instead of ROI. For some channels, attribution may not be straightforward, and the line between Direct ROAS and Blended ROAS may be more blurry. This is particularly true for influencer marketing, TV and other offline campaigns.
While there is no exact consensus on the definition itself, there are also discrepancies on the expression of its own value. By the first definition (revenue/spend), a campaign yeilding $50 on $100 invested would be 50% ROAS, or 1:2, but some express it as (revenue/spend -1), and this campaign would be said to have -50% ROI: it indeed lost money.

Evolution of UA KPIs: from CPM to ROAS

For a long time, app marketers have taken the simplistic route and were measuring the efficiency by looking at their CPI. CPI was already a step forward measuring campaigns based on high funnel metrics like Reach, CPM or cpc, but isn't a complete representation of performance, as it says nothing about the revenue generated by those installs. As the industry matured, UA metrics moved down the funnel to CPA (cost per action, based on events count) and eventually ROAS & ROI become the primary KPI of User Acquisition (UA).

For many, ROAS is the ultimate measurement of app marketing campaigns. Advanced advertisers often contrast this pure profitability figure with additional measurement of traffic quality, including long term retention or virality, among other positive side-effects of UA campaigns.

The importance of granularity

"ROAS" can be used to describe the overall performance of UA, and gives a good top-level understanding of profitability. Yet, app business should aim at being able to observe it with the maximum level of granularity, including network (channel), campaign, adgroups/targeting (including geo & OS) and ads/creatives, to be able to act on the detailed levers of their ad spend efficiently.
 

Timeframe & payback period

There is no standard for the timeframe in which ROAS is measured, most of the time ROAS will be defined by the lifetime value (LTV) of these cohorts. Due to the need for immediate feedback about campaign performance, most are using projected values of LTV, or pLTV, to estimate ROAS. Some marketers use a shorter timeframe, like first week ROAS or first month ROAS (m0-ROAS) to work on exact data instead.

LTV-ROAS does not provide information about how fast money is recouped, and understanding the velocity at which LTV compounds to the business is critical in determining the payback period of adspend, to anticipate cash flow trends. A perfect profitable app business could actually shut down if payback is not factored properly:

"Companies can go bankrupt buying advertising on an LTV-profitable basis", Eric Seufert

Defining Ad Spend
UA costs are usually straightforward. It's what your company is paying for the campaigns, and there are usually no issue on taxes, fees, converting currencies, etc. Plain and simple.
It doesn't necessarily refect the full extend of return on investment (some channels require much higher maintenance & execution time), but factoring the cost of running the campaigns is a complex exercise, rarely reliable nor comparable. Employees' time and agencies fees are for usually excluded from the calculation and accounted under structure costs.

Defining revenue
In most cases, marketers are working on net proceeds: the "revenue" in the initial formula would be counted as "net revenue after tax & fees", otherwise called "proceeds" as by Apple standards. Using gross value is not helping to understand if the ad spend is actually profitable and is a mispresentation. For the same reason, you want to factor revenue as your comission, not bookings, in the case of e-commerce or marketplace for instance.

Calculating pLTV
The calculation of this LTV net revenue to estimate to its full extent the impact of campaign can vary vastly depending on the business model of the app. In particular between e-commerce, IAP-based monetization (including subscriptions), ads-based monetization, or a mix of the above. Read more about pLTV calculation and the different cases mentioned in this guide to pLTV from Appsflyer.

At the end of the day, without consensus on the terms and their calculation, the vocabulary you pick and definition you attach to the two sides of the equation may be specific to your business, but they should be consistent across channels and over time to enable comparisons and eventually surface if your UA activity are making sense from a profitability point of view.

Return On Ad Spend (ROAS) is a revenue-based KPI which measures the performance of User Acquisition (UA).

In simple words, it will show how much we get out of a campaign when we spend on UA. It’s very important to have accurate attribution data for calculating ROAS.

Importance of ROAS

• ROAS shifts the focus from top-line to the bottom-line. While some campaigns may be generating high revenue, we may not know whether they are profitable or not.

• ROAS helps in understanding whether the money spent on UA campaigns is profitable or not.

• ROAS can be calculated for each Source across Platforms & Geos to identify the profitable cohorts and scale them.

• It helps in optimal budget allocation. We can shift the budgets from non-profitable campaigns to the most profitable ones.

• It helps in getting the best ROI for a given UA budget.

Calculation of ROAS

ROAS can be expressed as a Ratio or as a Percentage.  Following are some ways to calculate it:

Direct ROAS

If you want to calculate Direct Return from only Inorganic cohorts then:

DROAS = (Net IAP Revenue from the Inorganic cohort + Ad Revenue from the Inorganic cohort) / (UA Spend on the Inorganic cohort)

Effective or Overall ROAS

This gives an overall picture. It includes the Organic return too since the volume of Organics improves due to UA volume.

eROAS = (Net IAP Revenue from both Inorganic & Organic cohorts + Ad Revenue from both Inorganic & Organic cohorts) / (UA Spend on the Inorganic cohorts)

Here’s a simple example:

What is the ideal ROAS goal for an app?

There are no hard and fast rules. It is completely dependent upon the following:

• Type of the App

• Business Objectives and Profit Goals

• UA Scale

• Operating Expenses

• Amount of Working Capital

Time Period

Based on the Retention, LTV and Payback Period of the App, ROAS values could be D3, D7, D15, D30, D60, D90, D180 and more…

For e.g.

If you are targeting D180 ROAS, then you will consider D180 ROAS values of cohorts which are older than 180 days and projected D180 ROAS values for the cohorts which are yet to mature. 

ROAS across multiple Apps

Some App publishers calculate ROAS across their different Apps to factor in the networking impact due to Cross-Promotion.

ROAS as ROI

Some App publishers deduct all the expenses to arrive at the final ROAS value which is similar to calculating Return On Investment (ROI). While ROAS is for different campaigns, ROI is for the overall UA Spend.

Some Points:

• For Apps based on App subscriptions, add the total net revenue from App Subscriptions.

• For Gross ROAS, add the Gross Revenue instead of Net Revenue.

• High ROAS may not always indicate the quality of the campaign. Campaigns which have very high ROAS at low scale may not be sustainable at higher UA scale. Best campaigns are those which yield high ROAS at high scales.