Return On Ad Spend (ROAS)

ROAS (return on ad spend) refers to your revenue from every dollar you spend on advertising as a key metric in marketing that can help determine the effectiveness of your ad campaign. A ROAS of 4.0 would yield $4 in sales from a $1 investment, with the ability to optimize should be leveraged in the growth of your business with ad spending.

ROAS is the most important actionable metric when planning to invest in digital advertising for app growth. To optimize your advertising with data, it’s crucial to understand how much revenue is produced from each dollar spent on ads. It helps you see how much revenue you generate from each dollar spent, which indicates both how well your overall advertising investments are performing, along with how well each particular investment within a larger campaign behaved. Also, if you are launching a new campaign, or reviewing a prior campaign, ROAS provides an indicator of how to succeed with those investments. Being able to understand Return on Ad Spend, for your ad campaign means you’re using data to support decisions that will lead to greater success. Therefore, having the ability to track what is and isn’t working helps improve your ability to grow your app more effectively.

What Is ROAS (Return on Ad Spend)?

ROAS serves as the primary performance measure of your advertising campaigns that allows you to define how successful these campaigns are and the amount of money that you have generated through your investment in advertising. The money that you earn through your advertising investments can clearly be seen by using the ROAS calculation, and the ROAS metric is needed to evaluate all marketing campaigns to identify if the current strategies are generating adequate returns.

Return on ad spend, is very important to marketers and app owners, as it provides marketers and app owners with a metric to determine how much they will be able to spend on advertising, how well their marketing campaigns are performing, and when they should consider increasing their advertising expenditures. All businesses in the mobile industry need to be aware of the financial effect of their marketing actions in relation to the relationship metrics that they are able to create, and this is a requirement of doing business in the mobile space. 

Why Measure Return on Ad Spend?

A method of measuring return on ad spend (ROAS) allows you to know if your advertising investment is yielding a return. Mobile marketing requires you to measure every impression, click, and install from users because both the cost of those impressions and the user’s ability to pay attention to your ads have increased significantly.

If you are still questioning “why should I measure ROAS?”, let’s get clear on why this is a vital part of your business strategy:

1. It proves real success for your advertising campaigns. Just having a lot of installs does not guarantee that those installs will lead to the users paying money; ROAS measures outcomes rather than activity.
2. ROAS will help you determine how to best allocate your advertising budget. Once you know what campaign and what advertising channel provide the best ROAS, you can ensure that the appropriate resources are allocated to those areas.
3. ROAS allows you to make smarter decisions. By having access to real-time ROAS data, you have the ability to make instantaneous adjustments to your bids, creative assets and targeting to maximize your return.

If you want to find sustainable growth and maximize your marketing ROI, you will have to understand why you need to measure ROAS.

ROAS Formula

Evaluating return on ad spend provides easy-to-understand results for brands. The formula is:

Let’s break it down:

Revenue from Ads: Include all the income derived from your paid advertising (including e/g purchased sales/subscription revenue/above and below-the-line sales, etc.) 

Cost of Ads: Total ad spend plus any Additional Media Buying, Creative Production and/or Platform Service Fees incurred will also be accounted for in this category of expense.

Example:

If you spent $1,000 on a Facebook campaign and you earned $4,000 in revenue, your ROAS calculation is:

ROAS = $4,000 / $1,000 = 4.0

This calculation means you earned $4 for every $1 you spent – this is great performance in most industries. Your ROAS formula helps you understand both how well your campaign performs and if it can expand.

How to Calculate Return on Ad Spend 

ROAS is used by marketers and business leaders to evaluate whether their ad spend provides enough revenue from ads to warrant continuing to use advertising as a channel for generating growth.

Step 1: Measure Total Advertising Spend

In order to effectively measure ROAS, it is important that you know how much money has been spent on all forms of advertising, including traditional paid advertising, as well as non-traditional advertising. In addition to measuring ad spend, you should also include any and all costs that were incurred in connection with executing your advertising campaign. This includes, but is not limited to, the costs for developing and producing the ads, as well as the costs for hiring ad agencies to manage your advertising efforts. To ensure accurate tracking of your ad expenses and related expenses, maintain a single financial record-keeping system for all ad-related costs, regardless of the platform on which the ads run. The greater accuracy of your cost data will give you more accurate ROAS measurements.

Step 2: Track Revenue and Attribute It to Ad Spend

It is necessary to figure out how much revenue was generated by the ads after calculating your advertising expenses. This will depend on attribution in order to be effective. Your mobile measurement partner (MMP) tracking tool will be able to link user behaviors to the ad campaigns that led to those user behaviors [such as purchases, app use, or subscriber registrations]. The more thorough you make your tracking setup the better off you will be. A good attribution system can separate multiple channels driving results so you can see the impact each has.

Step 3: Calculate Your ROAS

Now that you have both your revenue and expense data, calculating your ROAS is very straightforward. Simply divide the total revenue generated (by ads) by the total cost of those ads. For example, if you were to spend $5,000 USD on ads and generate $20,000 USD in total revenue from this particular campaign, then your ROAS is 4.0 (400%). You have earned $4 for every dollar spent on Google ad spend.

You can calculate ROAS at multiple levels depending on what form of analysis you wish to conduct – at a campaign level, a channel level, by market/geographic region; by audience age/gender/income etc. The result is that you will be able not only to evaluate whether or not your ads converted well but will also enable insight into which ad channels performed best overall.

Step 4: Analyze and Visualize ROAS Data

You can obtain the greatest benefit from ROAS data by visualizing the information. Tracking actual performance changes and identifying weaker areas through real-time dashboards will allow you to assess how well your various campaigns or markets perform. By having one omnipresent dashboard for all of Marketing’s operations, everyone can easily view and utilize ROAS metrics.

By comparing ROAS with CAC, LTV, and the customer churn rate, you get a much clearer picture of how successful your campaigns were performed. This assists decision-makers in updating their creative direction and developing customer selection strategies.

Step 5: Act on Your Insights

Return on Advertising Spend is a metric that can provide valuable information only if you make use of it. Evaluate the ROAS data to find out what marketing efforts are generating a good ROAS and which are not by evaluating previous marketing efforts and looking at the planned ROAS from the previous marketing efforts when considering your next steps. You might use your assessment of ROAS to transfer funds from poor-performing campaigns to high-performing campaigns.

In addition to manual adjustments, several advertising platforms have developed systems that allow you to employ automatic rules when your reporting for ROAS meets specific thresholds (for example, to stop running or enable increased bids on your ads if the ROAS dropped or experienced performance). This helps improve campaigns by allowing you to automatically make performance-based adjustments rather than having to monitor performance.

What Is a Good Return on Ad Spend?

There is no single standard or average for the return on advertising spend (ROAS), as it varies based on business type and intended market and audience. Although, in most cases, marketers want their returns to be 3 times greater than their investments (i.e., $3 in revenue for every $1 in costs). There are several variables that will impact an organization’s expected return on ad spend. 

Factors that influence what is a good return on ad spend include:

User Lifetime Value (LTV): If there’s a good LTV for your product due to long retention and revenue streams (e.g., subscription services, frequent purchases), the return on ad spend could still be positive after a longer period.

Acquisition Costs: Additional competition and poor targeting may lead to high acquisition costs, requiring the organization to produce higher ROAS to be considered successful.

Timeframe: Negative return on ad spend, early on in the process may turn to positive numbers further down the road when there is a larger number of users contributing to revenue.

How to Improve Your ROAS

Better ROAS results come from effective process changes throughout the complete advertising campaign. Key strategies include:

Precise Audience Segmentation: Your priority for advertising should be based on the behavioral indicators (e.g., in-app usage) of the user rather than just data from their demographics.

Deep Funnel Tracking: Rather than just tracking the number of installs, you should examine the subsequent actions of users after they install your application, such as signing up, making a purchase, and whether or not you retain them as users to determine their value.

Real-Time Campaign Optimization: Re-evaluate your campaigns immediately using ROAS-based rules to automatically adjust campaign expenditures based on performance metrics, and to reallocate advertising expenditures towards the successful areas of your campaign while withdrawing from areas that are not successful.

Contextual Targeting: By utilizing contextual information, you will be better able to target specific users when they need it most to receive a higher return on investment in engagement.

Fraud Prevention: Removing fraudulently acquired website traffic or invalid installs will allow you to more accurately assess the effectiveness of your advertising campaign. The cost of advertising will rise when an individual has illegally acquired an app, failed to complete any purchases through that app, and then attempted to utilize the app to conduct any activity.

ROAS vs. Other Metrics: Why ROAS Matters Most

Marketers typically leverage metrics like CPI (Cost Per Install), CTR (Click-Through Rate), and CPA (Cost Per Action). These are good, but not the total picture.

Here’s what makes ROAS stand out: 

• CPI reveals the acquisition cost, but not its worth.
• CTR shows interest, but not conversion.
• CPA counts actions, but ignores revenue.

Return on ad spend shows the direct connection of your ad spend to revenue. ROAS shows not only how much you spent, but how much you earned.

It is more than just a metric, it’s a compass in performance marketing. Whether you are introducing a new campaign, optimizing an existing campaign, or analyzing results in the aggregate, understanding and improving ROAS is important to growing sustainably. 

If you are wondering how to calculate return on ad spend, looking for the ROAS formula, or asking what is a good ROAS, this guide gives you everything you need to be successful.

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