As I pointed out in my article ROAS is in the eye of the ROAS-holder, it’s very important to be crystal clear on the specifics of ROAS-es to be able to make the right marketing & financial decisions.
Even after we are clear about the contextual dimensions of ROAS by itself, there are multiple ways of measuring profitability. It’s important to recognize which one is the best lens through which to look at your financial planning with. Depending on how you interpret and use your ROAS numbers, you can justify different levels of investment into your growth & user acquisition.
Here are the 3 key different approaches to calculate your mobile marketing profitability -> and their implications for your growth strategy:
1. Strict -> ROAS = Revenue from paid installs/costs.
This is the ’strictest’ or most conservative approach to measuring ROAS. You look at your revenue from paid sources and compare these with your costs to calculate your ROAS.
In the below example, you spent $100 and made back $100 from paid ads and $50 from organic users. As per this definition, your ROAS is 100%.
You could then set your future budget so as to make enough revenue from paid users(not organic ones) that you recover your costs within your payback period(assumed to be d365 in the below example).
2. Liberal -> ROAS = Revenue from paid + organic installs/costs.
This is the ’liberal’ or most aggressive approach. You look at your revenue from paid + organic sources and compare these with your costs to calculate your ROAS based on these.
If we were to take the above ‘strict’ approach – and modify the ROAS calculation so as to account for organic and paid users, your ROAS would be:
Total cohorted revenue/costs
150/100
= 150%
You could then set your future budget so as to make enough revenue from paid + organic users that you recover your costs within your payback period(assumed to be d365 below).
In this case, you *could* set increased budgets compared to the ‘strict’ strategy since your ROAS(= revenue from paid + organic users/cost) is over 100% – and you think you can afford to spend more than the ‘strict’ strategy.
That said, it’s important to understand that as before, this is just a sleight-of-hand – and your actual money-in-the-bank isnt any different from the ‘strict’ case. While looking at ROAS through this lens helps justify a growth-oriented strategy and aggressive investments, this growth can often come at the expense of short term profitability.
3. Realistic -> ROAS = (Revenue from paid installs + organics attributable to paid installs)/costs.
You look at your revenue from paid users + organic users that can be attributable/correlatable to paid users – and compare these with your costs to calculate your ROAS based on these.
In the example below, if each paid user drives 0.25 organic users, then your ROAS would be:
Paid + attributed organic revenue/costs
125/100
= 125%
Since your revenue from paid + attributable organic users is higher($125) than the strict strategy($100) but less than the liberal strategy($150), you could set your budget so as to make enough revenue from paid + attributable/correlatable organic users that you recover your costs within your payback period(assumed to be d365).
With this, you can afford to spend more than the ‘strict’ strategy – but less than the liberal strategy.
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How do each of these strategies compare against each other?
The ‘strict’ approach can help justify minimal investment and maximal profitability – but less growth.
The ‘liberal’ approach can help justify maximal investment and minimal profitability – but high growth.
The ‘realistic’ approach is between the strict and liberal ones – and can be seen as the most ‘realistic’.
Most real companies typically need to adopt an approach that’s best suited to their business goals – depending on whether they need to grow fast or maximize profits or do something in between. Pick your approach according to your goals.
Happy planning!
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