What Is ROAS in Marketing? Meaning, Formula, and Calculation

Learn what does ROAS mean in marketing, why it’s an essential advertising metric, and how to calculate it!

Return on Ad Spend (ROAS) Meaning in Marketing

ROI vs ROAS: What’s the Difference?

ROI measures the overall profitability of an investment by comparing net profit to total investment costs, while ROAS specifically measures the revenue generated from advertising relative to the ad spend.

Key Differences

1. Scope:
   • ROI: Measures the profitability of an entire investment, considering all associated costs and net profit.
   • ROAS: Measures the efficiency and effectiveness of advertising spend, focusing solely on the revenue generated by the ads.
2. Purpose:
   • ROI: Used to determine the overall success and profitability of various investments and projects, providing a holistic view of financial performance.
   • ROAS: Used to assess the effectiveness of advertising campaigns, helping marketers understand how well their ad spend is generating revenue.
3. Calculation Factors:
   • ROI: Considers all costs and revenues associated with the investment, including indirect costs and overheads.
   • ROAS: Only considers direct advertising costs and the revenue generated from those ads.
4. Applications:
   • ROI: Applied to a wide range of business decisions, including product launches, infrastructure investments, and marketing strategies.
   • ROAS: Specifically used in marketing to optimize ad spend and improve campaign performance.

Return on Ad Spend (ROAS) Formula

Interpretation

• ROAS > 1: Indicates that the revenue from the ads is greater than the cost, implying a profitable campaign.
• ROAS < 1: Indicates that the revenue is less than the cost, implying an unprofitable campaign.
• ROAS = 1: Indicates that the revenue equals the cost, implying a break-even campaign.

Example

How to Calculate ROAS?

Calculating Return on Ad Spend is straightforward. Follow these steps:

1. Determine Total Revenue from Ads:
   • Calculate the total revenue generated from your advertising campaigns over a specific period. This revenue should directly result from the ads in question.
2. Determine Total Cost of Ads:
   • Calculate the total amount spent on the advertising campaigns over the same period. This includes all costs associated with the ads, such as media spend, production costs, and any other related expenses.
3. Apply the ROAS Formula: ROAS = Revenue from Ads / Cost of Ads

Example ROAS Calculation

Example 1:

• Total Revenue from Ads: $10,000
• Total Cost of Ads: $2,000

ROAS = 10,000 / 2,000 = 5

This means for every $1 spent on advertising, $5 is generated in revenue.

Example 2:

• Total Revenue from Ads: $15,000
• Total Cost of Ads: $5,000

ROAS = 15,000 / 5,000 = 3

This means for every $1 spent on advertising, $3 is generated in revenue.

Detailed Steps with a Hypothetical Scenario

1. Track Ad Campaign Performance
   • Suppose an e-commerce store runs a month-long advertising campaign on Google Ads.
   • During this period, the store tracks that the campaign directly generates $50,000 in sales revenue.
2. Calculate Total Ad Spend
   • The store also records all expenses related to this ad campaign, including:
     • Media spend on Google Ads: $10,000
     • Creative development costs: $2,000
     • Any additional fees (e.g., agency fees): $1,000
   • Total cost of ads = $10,000 + $2,000 + $1,000 = $13,000
3. Calculate return on ad spend: ROAS = 50,000 / 13,000 ≈ 3.85

This means for every $1 spent on the advertising campaign, the store earns approximately $3.85 in revenue.

Key Points to Remember When Calculating ROAS

• Consistency: Ensure the revenue and cost figures are from the same time period.
• Attribution: Accurately attribute revenue to the specific ads to get a precise return on ad spend calculation.
• Granularity: You can calculate ROAS for individual campaigns, ad groups, or even specific ads to analyze performance at different levels.

Return on Ad Spend Calculator

For a quick way to calculate ROAS, use our return on ad spend calculator!

What Is a Good ROAS?

A good return on ad spend can vary significantly depending on the industry, business model, and specific goals of the advertising campaign.

However, there are some general guidelines and considerations to help determine what constitutes a good ROAS.

General ROAS Benchmarks

• E-commerce: A common benchmark for e-commerce businesses is a ROAS of 4:1, meaning $4 in revenue for every $1 spent on advertising. This can vary widely depending on the product margins and market competition.
• Lead Generation: For businesses focused on lead generation, a lower return on ad spend might be acceptable if the value of each lead is high. For instance, a ROAS of 2:1 might be considered good if the leads generated convert into high-value sales.
• Brand Awareness: Campaigns aimed at increasing brand awareness might have a lower return on ad spend because the primary goal is not immediate sales but long-term brand building.

Average ROAS

• E-commerce: Typically, e-commerce businesses aim for a return on ad spend of around 2.87:1. Specific sectors like baby products see an average ROAS of 3.71:1, while health and beauty averages 2.82:1.
• Retail: The retail sector often targets a ROAS ranging from 4:1 to 8:1, depending on the product margins and competition levels.
• Travel and Hospitality: This industry usually aims for a higher return on ad spend, around 6:1 or more, due to significant variable costs and high competition​.
• Consumer Packaged Goods (CPG): The average return on ad spend for CPG companies is lower, often around 2:1 to 4:1, given the lower profit margins per unit.

Digital Advertising Platforms

• Google Ads: The average ROAS on Google Ads is quite high, at approximately 13.76:1, due to its extensive reach and effective targeting capabilities.
• Facebook Ads: Facebook achieves an average return on ad spend of 10.68:1, leveraging its large user base and sophisticated ad tools.
• Instagram Ads: Instagram sees a slightly lower average ROAS at 8.83:1, reflecting its strong visual engagement but slightly narrower targeting compared to Facebook.

Mobile App and Gaming Industries:

Factors Influencing Good ROAS

1. Profit Margins: Higher profit margins allow for a lower ROAS to still be profitable. Conversely, lower profit margins require a higher return on ad spend.
2. Customer Lifetime Value (CLV): If customers tend to make repeat purchases, a lower initial ROAS might be acceptable as the long-term value is higher.
3. Business Goals: Short-term promotional campaigns might aim for a higher return on ad spend, while long-term brand-building campaigns might accept a lower ROAS.
4. Market Competition: Highly competitive markets often require more significant ad spend to achieve a good ROAS, as cost-per-click (CPC) or cost-per-impression (CPM) rates are higher.
5. Ad Quality and Relevance: Better-targeted, high-quality ads tend to achieve higher returns on ad spend by converting more efficiently.

Determining Your Target ROAS

1. Calculate Breakeven ROAS: Determine the minimum return on ad spend needed to cover your costs. Breakeven ROAS = 1 / Profit Margin Breakeven. For example, if your profit margin is 25%, the breakeven ROAS is 4:1.
2. Set Realistic Goals: Consider industry benchmarks, historical performance, and campaign goals.
3. Adjust for Strategy: Tailor your ROAS targets based on the specific goals of each campaign, whether it’s for direct sales, lead generation, or brand awareness.

To determine a ROAS goal for apps or games, check out the following section.

Determining a ROAS Goal for Apps and Games

Does your game make money from in-app purchases, ads, subscriptions, or all three?

Whatever monetization model your game uses, this guide to calculate a ROAS goal should work for you. It considers all types of revenue streams and metrics that affect your return on ad spend. 

Here are seven steps to help you determine your game’s ROAS goal. 

Step 1: Specify Your Game’s ARPU 

ARPU stands for average revenue per user. Basically, it tells you what is the average amount of revenue you earn from each user in a certain period. 

This monetization metric gives you important information about your game’s revenue and users. 

Generally, ARPU provides great insights into the performance of in-game features. It helps you optimize your IAP offer pricing, ad placements, acquisition channels, and revenue quality. 

When it comes to return on ad spend, ARPU is a far more important metric than your campaign’s CPI.

It’s pretty straightforward – if your CPI drops, this doesn’t necessarily mean your ROAS will increase. But if your ROAS increases, so will your ARPU. If one falls, the other will follow. 

Here’s how you calculate ARPU. 

First, sum up your game’s total revenue over a specific time period (e.g. day or week). Then,  divide it by the number of active users you had during that period. 

This metric is not static. 

For this reason, you should track it with an ARPU curve.

This kind of curve allows you to compare your game’s revenues against its retention rates. 

For example, you may notice that the longer average users play the game, the more revenue they bring. Just like in the case of the hyper-casual game above. 

Step 2: Determine ARPU and LTV

LTV (lifetime value) is the total revenue a single user will bring you over the whole time they play a game. 

This metric is super important for targeting the right users, understanding their behavior, and your game’s total success.

LTV and ARPU are interconnected, so you’ll need to track both. 

For example, even if your campaigns’ ARPU is increasing, it’s still possible that the players’ LTVs are decreasing. 

If you cross your ARPU and LTV data, you may find out that you should change your approach. 

If a user spends 8 cents a day on average while playing a game for a total of 50 days, this user’s LTV is $4.

Is this good or bad? Again, it depends on your game. 

LTV is an important metric because it defines your marketing strategy and profit margins. 

How much should you afford to spend to acquire a single user (CPI)? Well, not more than you’re going to earn from them in the long run.  

Step 3: Count in Organic Traffic

If you want to set up a ROAS goal properly, you need to consider the big picture.

Not all of your users come from UA campaigns. 

Some heard about your game from friends, while others found it while wandering around the app store. This is what we also call the “K-factor”.

The ARPU curve we mentioned earlier doesn’t include these users. It measures only the users you’ve acquired through UA campaigns. 

How do you prevent this from happening? 

Check your analytics to see where all of your revenues are coming from. 

Let’s say you found out that 20% of your revenues are coming from organic users. This is not a neglectable number, so you need to add this up to your LTV calculation.

Here’s a formula to help you out with this. 

Paid (including organic) LTV = Paid LTV  * [1 + organic revenue percentage]

If you’re not considering organic users – your numbers are wrong. You are leaving quite a bit of revenue share from your ARPU and LTV calculations. 

Step 4: Setting Your Margins

At this point, you’ve specified three important monetization metrics (ARPU, LTV, organic revenue).

This means you’re all ready to set your ROAS goal.

You have only one thing left to do before that – determine your margins. Profit margins are here to let you know if your campaigns are breaking even. For this reason, you have to set the margins right. 

How do you do that?

First, think about your goals. 

Are you more interested in high short-term profits, or long-term revenues?

If you increase your margins, you may get more short-term revenues, but at a lower scale. 

For example, if your eCPI is $0.50, and your margin is as high as 15%, you will earn $0.08 per user. With this approach, you would get fewer, but more valuable users. Also, you would hit the break-even point sooner. 

On the other hand, if you set lower margins per user, you’re bidding on higher CPIs. 

For example, if you lowered your margin to 10%, your eCPI would automatically increase to approx. $0.55. This way, you would acquire more users, but it would take longer until you break even. However, in the long run, this approach should pay off. 

Step 5: It’s Time to Determine a ROAS Goal 

Once you set the margin, it’s finally time to calculate your ROAS goal. 

If your game is based on ad revenue, you should focus on a short-time goal. Best practices suggest that you fixate on day 3 return on ad spend.

If it’s based on in-app purchases, focus on a longer time period. In most cases, advertisers focus on day 7 ROAS. 

In this formula, we’re focusing on a day 3 ROAS.

Day 3 ROAS goal = Day 3 ARPU / (LTV*organic revenue*(1- goal margin))

Let me explain it. 

Take your day 3 ARPU and divide it by the ARPU of the breakeven day (e.g. day 60). This is the day when your users finally give you a 100% return on investment. 

In the example above, the calculated ROAS goal is 46%. In other words, this game expects to get 46% of a user’s total worth by their third day of playing. 

Step 6: Consider Both IAP and Ads Revenue

Many mobile games monetize with both in-app purchases and in-app ads, which is known as a hybrid monetization model.

A common mistake developers do is to determine ROAS goals based solely on in-app purchase revenue, not taking ads revenue into account. This results in incomplete ROAS values.

Here’s how to mitigate that.

Some developers come up with a ROAS goal based on IAP data, but then increase it by ad revenue share. For example, let’s say a game earns 70% of its revenue from IAP and 30% from in-app ads. In this case, you’d increase your ROAS goal by 30%.

However, this method is still incomplete as it doesn’t take into account monetization data on users like different monetization behaviors, the quality of organic and paid users, etc.

Here’s an example of how to calculate a day 7 ROAS goal that includes both IAP and ads data.

1. Determine LTV for IAP and ads revenue separately
2. Set your margins based on LTV curves
3. Calculate ARPU (IAP + ad revenue)
4. Divide ARPU for each day by the total LTV and you’ll get day 7 ROAS goal

Step 7: Don’t Put Everyone in the Same Category

When you’re determining your players’ LTVs, there are many things you should consider. This includes your game’s genre, the players’ locations, their operating systems, etc.  

Let’s say you’re targeting Android users in Pakistan for a hyper-casual game.

You shouldn’t expect too much from them. 

It’s nothing personal, though. 

The thing is, Android users are usually less valuable than iOS users. Since Pakistan is a Tier 3 country, it is expected to bring lower value users. 

Plus, when you have a hyper-casual game, you generally don’t expect high LTVs. They usually range from $0.20 to $0.40 (Department of Play). 

If you have a mid-core game and you’re targeting iOS users in the US, this is a whole other story. 

Mid-core games’ LTVs usually range from $2 to $5 (Department of Play). Plus, we have a Tier 1 country and an iOS user. Therefore, in this case, you can expect higher LTVs. 

See it?

All of these different segments influence your players’ LTVs and other monetization metrics. 

Therefore, they influence your ROAS goals as well. For this reason, you need to adjust your ROAS goal according to all these different segments. 

If you don’t do this, you won’t have exact LTV data. As a result, you won’t be able to optimize your UA campaigns effectively. 

Step 8: Repeat The Process

None of this is a one-time job. 

This is because monetization metrics are dynamic by nature. 

For example, your players’ LTVs are changing all the time. There are so many things that influence them – new competitors, seasonality, in-game updates, etc. 

Let’s say a new game by a big publisher appears in the genre. This can make a lot of players transfer from one game to the other. 

Real-world events also have a significant impact on game monetization. Think about Christmas, Valentine’s Day, or Thanksgiving. All of these events will have an impact on player LTVs. 

Consequently, they will influence your ROAS goals as well. 

Then, there are all the changes that happen within the game. For example, if you’ve just added new ad placements or new game content, your metrics will feel it.  

Wrapping up On Calculating A ROAS Goal 

That’s it, you’re all set to determine ROAS goals for your user acquisition campaigns! 

If you still feel confused about all of this, feel free to contact us! Our user acquisition team acquired over 300 million users and launched numerous games into the top charts.