What is return on ad spend (ROAS)?
Return on ad spend, or ROAS for short, is a widely-used profitability metric to calculate and gauge the profitability of running ads.
The ROAS formula is a rather straightforward calculation: the revenues generated by installs attributed to the ad divided by the cost of running the ad.
Although there are different variations of the ROAS metric, it is mainly used in relation to a specific time period.
Examples of these periods are a week or two: Day 7 ROAS and Day 14 ROAS. These refer to the amount of time after an install has occurred. For example, a Day 7 ROAS would consider the revenues generated by users seven days after they installed the app, based on the ad.
Why is ROAS important?
When a paid user acquisition team runs ads, the ultimate goal is to drive enough quality installs to eventually generate more revenue than the cost of the ad. The lifetime value of a user takes weeks, months, and sometimes years to realize. This means teams require a methodology to quickly understand whether an ad is driving users of a high-enough quality.
Thus, many teams develop models that attempt to predict the quality of a user from an ad before too much of their budget is spent on an ad that is doomed to be non-profitable. These models’ outputs may show that ads that don’t achieve a Day 7 ROAS of 8% after running for a week won’t reach profitability (ROAS more than 100%).
ROAS and App Store growth
Although ROAS is a strictly paid user acquisition metric, the reality is more complex. If an app marketing team is running an ad on YouTube, and the ROAS seems extremely low, the team will decide to shut down the ad. But what if the ad caused many users to be aware of the brand and then look for it in the App Store? Taking into account that effect would cause the team to continue to run the ad.
To maximize app store growth, smart marketing teams consider the total effect of an ad in addition to the direct ROAS metric.
