What is return on ad spend (ROAS)?
The definition of ROAS
Return on ad spend (ROAS) is an important key performance indicator (KPI) in online and mobile marketing. It refers to the amount of revenue that is earned for every dollar spent on a campaign. Based on the return on investment (ROI) principle, it shows the profit achieved for each advertising expense and can be measured both on a high level and on a more granular basis. Whether you want to measure ROAS for an entire marketing strategy or look at performance at the campaign, targeting, or ad level, it’s a key metric for measuring and determining strategic success in mobile advertising.
How to calculate return on ad spend (ROAS)
ROAS can be calculated with a simple formula:
ROAS = (revenue attributable to ads / cost of ads) x 100
Think about it this way: Let’s say you’re running an ad campaign that you invest $1000 into, and you are able to attribute $3000 in revenue to those ads. Using the ROAS formula, you can determine an ROAS of 3, which is a very good result.
Calculating ROAS becomes a little bit more complicated when determining what the cost of ads is, and there are a couple of decisions to be made. Firstly, you need to determine whether you want to track the dollar amount spent on a specific platform, or if you want to bundle extra advertising costs in. For example:
Vendor costs: Vendors you work with will most likely take commission fees for running the ad campaign.
Team costs: You need to pay a person to set-up and manage the campaigns, whether they’re in-house or at an agency.
The way you define ‘cost of ads’ in your ROAS calculation will depend on the type of campaign you’re running. Sometimes it’s most effective to work solely with the exact ad costs, and then create a separate ROAS that incorporates all collateral ad expenditure. This way you’ll have visibility on the overall performance and profitability of every campaign for which ROAS is a KPI.
What is the difference between ROAS and ROI?
As covered above, ROAS refers to return on ad spend, while ROI refers to return on investment. When calculating an ROI, you’re looking at measuring the return on a particular investment relative to what the cost of that investment was. It’s a calculation of your net profit and the investment, with a formula that generally looks like this:
ROI = (Net profit / net investment) x 100
While similar but not the same, ROAS aims to help advertisers and marketers determine the overall efficiency of online or mobile marketing campaigns by calculating the exact amount of money that is earnt from a campaign relative to the exact amount of money that was invested into it. One important takeaway is that a negative ROI can still be a positive ROAS, because your overall investment might be higher than the profit generated, but relative to the investment in the advertising campaigns themselves (depending on how you calculate that), the ROAS itself can be positive.
Should I use ROI or ROAS?
When creating a campaign or marketing strategy, ROI vs. ROAS is not an either/or decision. ROIs are best leveraged to help gain visibility over long-term profitability, and ROAS might be more helpful in optimizing for short-term or very specific strategies. When building out a high-level mobile marketing campaign or strategy, utilizing both ROI and ROAS formulas is a best practice. Within mobile marketing, ROI and ROAS are both crucial metrics for marketers and advertisers to work with. Whereas ROI can be applied high-level to measure overall profits, ROAS will help you determine how much a campaign is contributing to those overall profits.
How is ROAS used in mobile marketing?
ROAS is most useful in mobile marketing when you’ve scaled to the point that you’re tracking multiple campaigns, channels, and ad platforms, and need oversight over which are the most effective and should continue receiving budget allocation. We covered above that ROAS can be applied at various levels and with varying degrees of granularity. So you might like to calculate ROAS on your overall ad spend, and then calculate by channel, campaign, and platform to determine your best performing channels, or where the highest level of profitability is likely to come from.
We recommend calculating a minimum ROAS before launching any campaign, so that you can identify whether performance is at an acceptable level or not as quickly as possible. Determining what this minimum is is somewhat more complex, and will depend on your app type, vertical, and the growth stage that it's at, but it's also something that can remain flexible as profit margins and business expenses adapt.
ROAS can also be combined with other important metrics and KPIs typical to mobile marketing. PPC metrics like cost per click (CPC), cost per acquisition (CPA), and cost per lead (CLP) can all be complemented by ROAS to help paint a complete and clear picture for advertisers when determining how to hit targets.
Adjust provides clients with granular data and insights from all campaigns, accessible in a single dashboard that gives marketers and advertisers a clear overview of performance on all levels, including ROAS.
Learn more about our solution on Mobile App Attribution.
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