ROAS is a metric that app marketers can use to gauge their user acquisition (UA) efforts. They might want to gauge 3-day ROAS, 7-day ROAS, 30-day ROAS, etc. after the initial installation. These metrics will each help app marketers understand how much money users spent three, seven, and thirty days after installing their apps, highlighting the channels or campaigns that brought in the most valuable users.
For marketers, even a partial ROAS is useful information, especially when predictive analytics are used. For instance, if an app is aware that users who generate 50% or more of their cost by day 3 are very likely to become profitable users by day 30, it will take this information into account. Early campaign optimization in this situation can help ensure long-term positive ROAS by increasing or reducing underperforming ad sets and/or creatives in light of the data provided above.
Of course, there are instances where the ROAS is negative, such as when you spend $100 on advertising but only make $50 in profits. In this case, your ROAS would be 50%. If you discover that your ROAS is negative, now is the time to review your creatives and marketing strategies to identify the root of the issue and make the necessary adjustments.
Additionally, ROAS and eCPA are two of the most crucial campaign metrics; if either of these metrics is underperforming or not hitting its target (i.e., the advertiser is paying more than they intended to pay for an action), it is critical to optimize the campaign as soon as possible.
The number of clicks is multiplied by the number of impressions served to determine the CTR, or click through rate. A high CTR can be used to gauge how well a creative was at getting people to take action (click), as it is a sign that your ad struck a chord with the audience.
What Is ROAS: Everything You Need to Know About Return on Ad Spend
Why is return on ad spend important?
Companies can determine whether they are using their marketing budgets effectively by calculating return on ad spend. An ROAS can demonstrate how well a company’s messaging connects with its clientele and is successful in luring new clients. Using this metric, businesses can also spot process inefficiencies and find ways to make them more efficient. Companies can plan their upcoming advertising campaigns and marketing budgets in a way that reduces costs and boosts revenue by identifying marketing successes and challenges.
What is return on ad spend?
Marketing departments frequently use return on ad spend to determine how much money their business makes in relation to its advertising expenses. Marketers can monitor ROAS for large marketing budgets and advertising campaigns as well as for smaller, more specific projects. A marketing team can use this crucial metric to determine the effectiveness of their advertising, with higher rates of return indicating greater success.
Benefits of using return on ad spend
Here are some benefits of using return on ad spend:
A company can frequently find inefficiencies in its marketing operations by calculating ROAS. A low return on investment (ROAS) may indicate that the campaign is overspending on ad development, whether through employee salaries, vendor fees, or unproductive advertising channels. This enables businesses to focus on these regions in order to cut costs. They might eliminate certain vendors, cut back on staff working on certain advertising campaigns, or redirect resources away from less successful campaigns.
Indicates effective ad channels
A company may gain valuable knowledge about the channels that are most advantageous to them if it calculates the ROAS for each of its advertising campaigns separately. For instance, if a company runs a social media ad campaign, drip marketing text messages, and email advertisements, they might calculate the ROAS for each channel. If text and social media advertisements generate more views and sales, the business might think about putting more resources there and reducing or doing away with its email campaign.
By calculating its ROAS, a business can better understand its profitability and modify its goals and planning as necessary. Businesses can use ROAS to refine their messaging, hire more staff to produce effective advertising, and plan adequate marketing budgets for upcoming projects. Additionally, it can demonstrate to executives and board members how well they are able to reach their target audience. This can assist them in deciding whether to invest in the development of new products or concentrate on a different customer profile.
Calculating return on ad spend
Marketers divide the revenue from advertising by the cost of creating the advertisement to determine the return on ad spend. The formula looks like this:
Return on advertising investment is calculated as net income minus the cost of the advertising campaign.
Clarifying the costs of advertising could be helpful before performing this calculation. Businesses can do this by including the salaries of marketing staff, payments to advertising platforms, payments to vendors, and any other expenses incurred by the business during an advertising campaign. They can calculate their return on ad spend once they have determined their costs. Here is an illustration of how a business might determine its return on advertising spend:
A business sees an increase in revenue of $10,000 as a result of an advertising campaign. After factoring in salaries, vendor fees, and other associated costs, their campaign came to $5,500. They calculate their return on ad spend with this equation:
10,000 / 5,500 = 1.82
This means that they earned $1. 82 for every dollar that they spent on advertising.
Limitations of using return on ad spend
Here are some potential disadvantages of relying on ROAS:
Has a restricted scope
Although calculating ROAS can give important insights into a company’s profitability, it does not take into account business factors outside of marketing, such as production and distribution. Even if a company’s marketing is very successful, it might still lose money if its product is expensive to produce, faces fierce competition, or has high distributor fees. Companies can make sure and monitor their efficiency in every department using multiple metrics to prevent these oversights.
Can be inaccurate
Although calculating ROAS can be straightforward, obtaining the necessary numbers may be challenging. It might be difficult to identify every factor that affects advertising costs. Additionally, because customer motivations are rarely disclosed, it is challenging to attribute an increase in sales to a specific advertising campaign. To get around this uncertainty, businesses might think about utilizing different metrics, like those provided by e-commerce, which can track precise data and make it simpler to attribute revenue to advertising.
Works better when supplemented
Some business models may benefit more from a return on ad spend calculation than others. Because internet platforms provide metrics about which advertisements receive the most views and which customers choose to make purchases, it is frequently more successful in businesses that use e-commerce as their primary business model. This can help companies attribute revenue to their campaigns. Companies that use more conventional print or physical advertising without additional metrics may find that ROAS is less effective. These businesses might think about incorporating an e-commerce model or adding additional metrics to measure their success.
Tips for using return on ad spend
Think about the following advice to use ROAS in your marketing department effectively:
Understand your ROAS
Learn more about the ROAS metric and what it can and cannot tell you about your campaign, as well as what a good ROAS looks like. Knowing the specifics of its analysis can prevent you from applying it incorrectly, such as to determine overall profitability.
Businesses frequently disagree on what constitutes a good ROAS, and effective metrics can vary greatly. In order to remain profitable after marketing expenses, you might require a higher ROAS if your production, development, or distribution costs are high. Most of the time, you can be profitable with a ROAS of $4 in revenue for every dollar spent on advertising. Returns of $3 or less are frequently an indication that you might need to change your advertising strategy.
Develop a target
Consider setting a target once you are aware of your ROAS in order to increase your business’s advertising revenue. If you are an employee of a small business with low profit margins, you might set a target of $4 to $5 for every dollar you spend on advertising. Although a wider margin is frequently preferable, if your business is bigger and generates more profits, you may be able to maintain profitability with a ROAS of between $3 and $4 to every dollar of advertising.
Include other metrics
Consider using additional metrics in addition to ROAS to effectively monitor your company’s profitability. You could use a contribution margin, which can assist you in calculating revenue once the total cost of delivering a product has been subtracted. Additionally, you can keep an eye on your business’s development costs, payroll, production costs, and distribution costs. Understanding this data better can help you assess the financial health and profitability of your business.
Strategize methods for improvement
Determine your target ROAS and then plan how to increase your returns. The three main ways to improve are lowering your ad costs, increasing revenue without increasing costs, or lowering your ad costs while also raising revenues. Use product listing ads, which are keyword-based advertisements that show up in search results when a user searches for a particular product category. Utilizing these ads can greatly increase website traffic and, consequently, advertising revenue.
Consider using conversion rate optimization (CRO) if you use e-commerce to boost sales without significantly raising advertising expenses Conversion rate optimization seeks to increase the proportion of website visitors who make purchases. Improve your landing pages to better guide visitors through the purchasing process. Use related product advertisements all over your website to raise the average order value. You can also encourage customers to complete their shopping carts by reminding them when they leave your website without doing so.
What is a good return on ad spend?
Profit margins, operating costs, and the state of the company as a whole all affect what ROAS is deemed acceptable. There is no “correct” response, but a common ROAS benchmark is a 4:1 ratio, or $4 in revenue for every $1 spent on advertising.
How do you calculate total return on ad spend?
ROAS is calculated by dividing your total conversion value by your advertising costs. “Conversion value” gauges how much money your company makes from a specific conversion. Your return on advertising investment (ROAS) is 5 if selling one unit of a $100 product costs $20 in advertising.
Why is return on ad spend important?
Calculating ROAS is simple. You subtract the cost of your advertising campaign from the revenue that is attributed to it. For instance, if your revenue is $2,000 and you spend $1,000 on advertising, you would divide $2,000 by $1,000 to get your ROAS. This gives you a ratio of 2:1 or 200%.