Return on Ad Spend (ROAS)
What is ROAS
ROAS (Return on Ad Spend) is a crucial Key Performance Indicator (KPI) used in app marketing. ROAS measures the revenue earned for every dollar spent on an ad campaign. Tracking this metric yields insights into the effectiveness of an advertising campaign. It also helps measure an entire marketing strategy, targeting, or ad level.
How to calculate ROAS
The formula to calculate Return on Ad Spend is as follows.
ROAS = Revenue Attributable to Ads / Cost of Ads
For instance, if you invest $2000 into a campaign, you can attribute $6000 in revenue to this campaign. Then by using the ROAS formula, the ROAS is 300%.
There are many ways to determine the cost of ads and they are as follows.
- Salary cost: Expense spent on the in-house personnel who manage the ad campaign.
- Vendor cost: Fees of the vendors who facilitate the ad campaign.
- Tool cost: Price of the tool used for running the ads.
- Depreciation cost: Depreciation is the cost of the fixed assets according to their anticipated deteriorations.
Why is ROAS preferred over CPA
Cost Per Acquisition (CPA) is a common metric used to gauge the effectiveness of a paid search campaign. While it is a crucial metric, it only assesses the average expense linked to any individual action.
Let us take the example of two groups- Group A and Group B.
|Group A||Group B|
Both ad groups expended $200 and yielded 2 conversion each, yielding identical costs per acquisition of $100. However, when we assess the worth of each conversion, the contrast becomes evident. One ad group generated $100 from the $200 spent, while the other produced $600. This resulted in ROAS values of 50% and 300%, respectively—a substantial variance in returns for the same expenditure! Achieving an ROAS of less than 100% signifies an unprofitable effort, as you are earning less than $1 for every $1 spent. Conversely, an ROAS of 300% demonstrates that for every $1 invested in ads within that ad group, you're receiving $3 in return from the conversion.
Importance of ROAS
- Performance evaluation: Return on Ad Spend is important since it provides insights into the effectiveness of the ad campaigns and app marketing strategies.
- Budget allocation: It helps make decisions on budget allocation by giving insights on where to invest and where not to invest.
- Granular insights: ROAS can be examined at the macro level and also at a platform-specific level by looking into individual campaigns, ad sets, ads, and creatives.