ROAS, full form in digital marketing, is Return on Ad Spend; it is a crucial performance metric (KPI) within online and mobile marketing. It signifies the revenue generated for each dollar invested in a marketing campaign. Built on the foundation of the return on investment (ROI) concept, ROAS quantifies the profit gained per advertising expenditure and can be assessed at both a macro and micro level.
Whether you intend to assess ROAS across a full-fledged marketing strategy or delve into performance metrics at the campaign, audience targeting, or individual ad level, it remains a pivotal indicator for gauging and strategizing success in mobile advertising.
ROAS formula in digital marketing
You can determine ROAS using this straightforward formula –
Return on ad spend formula = (ad-generated revenue / ad expenses) x 100
To understand what is the return on ad spend for the campaign? Consider this scenario:
Suppose you’re managing an advertising campaign with a $1000 investment, and you can trace $3000 in revenue back to those ads. By applying the ROAS formula, you can calculate a ROAS of 3, indicating a highly favorable outcome.
Calculating ROAS can become slightly more intricate when considering how to define the cost of ads, involving a couple of choices. Initially, you must decide whether to track the exact dollar amount invested in a particular platform or include additional advertising expenses in the calculation.
Vendor expenses: It’s essential to account for vendor fees, as they typically charge commissions for running the ad campaign.
Team expenses: You’ll also need to include the costs associated with having someone set up and oversee the campaigns, whether it’s an in-house team or an agency.
The manner in which you define the ‘cost of ads’ in your ROAS digital marketing computation will be contingent on the specific type of campaign you’re executing. In some instances, it may be more advantageous to solely consider the direct ad costs while creating an exclusive ROAS metric encompassing all associated ad expenses.
This approach provides comprehensive insights into each campaign’s performance and ability to make profits, where ROAS serves as a key performance indicator.
ROAS vs. ROI
As mentioned previously, ROAS marketing pertains to profits generated on ad spend, whereas ROI is what refers to how much revenue is gained versus how much was spent.
In calculating ROI, you are evaluating the return generated from a specific investment in relation to the initial investment cost.
It’s a computation involving your total profit and the initial investment, typically represented by a formula similar to this –
ROI = (Total profit / Initial investment) x 100
Similar yet distinct, ROAS in marketing is designed to assist advertisers/marketers in evaluating the overall effectiveness of digital marketing campaigns. It achieves this by precisely measuring the revenue generated from a campaign in relation to the exact amount of money invested in it.
A crucial point is that a negative ROI may coexist with a positive ROAS. This can occur when your total investment surpasses the profit earned in relation to the investment specifically made in the advertising campaigns based on the calculation method used, in which case the ROAS can remain positive.
Which metric to use – ROAS or ROI?
When designing a marketing strategy or ad campaign, the choice between ROI and ROAS is not a strict proposition. ROI is particularly valuable for gaining insights into long-term gains, while ROAS can be more beneficial for fine-tuning short-term or highly targeted strategies.
For developing a comprehensive mobile marketing ad campaign/strategy, it’s considered a best practice to incorporate both ROI and ROAS calculations. In digital marketing, both serve as indispensable advertising/marketing metrics. While ROI can be applied at a macro level to assess overall profits, ROAS in marketing aids in pinpointing how much a campaign contributes to these overarching profit figures.
ROAS in digital marketing
Return on ad spends in mobile marketing becomes most valuable when your operations have expanded to the extent that you need to monitor numerous advertising campaigns, channels, and platforms. It offers a vantage point to discern the most effective ones deserving continued budget allocation.
You may consider computing ROAS for your entire ad expenditure and then further break it down by channel, campaign, and platform to pinpoint your top-performing channels or the areas where the highest profitability is anticipated.
Also, we suggest computing a minimum ROAS as a prerequisite prior to any campaign launch. This allows you to promptly assess whether performance meets acceptable standards. Establishing this minimum threshold is a nuanced process, contingent on factors such as your app category, industry sector, and the stage of growth it’s in. Additionally, this benchmark should remain adaptable, accommodating changes in profit margins and business costs.
ROAS can be integrated with various significant metrics and key performance indicators commonly used in digital marketing. Pay-per-click (PPC) metrics such as cost-per-click (CPC), cost-per-install (CPI), cost-per-acquisition (CPA), cost-per-thousand (CPM), cost-per-lead (CPL), and many others can be supplemented with ROAS to provide advertisers with a broader and unambiguous view when devising strategies to meet their objectives.
NextGrowthLabs (NGL) empowers marketers and advertisers with a consolidated dashboard, offering granular insights from their campaigns. This comprehensive view includes data on Return on ad spends (ROAS) to assess campaign effectiveness, allowing for informed decision-making and optimization in mobile marketing.