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KEY HIGHLIGHTS

⛑️ The simplistic approach of ROAS neglects the crucial factor of time in assessing performance.

🪗 The impact of different game genres on return metrics.

📚 mROI (monthly ROI), calculated by considering the profit a cohort generates over time.

📊 Internal Rate of Return (IRR) accounts for the time value of money and non-linear user monetization profiles. 

FULL TRANSCRIPT BELOW

Since the early days of performance marketing on mobile, marketers have been focused on ROAS as a metric to measure the performance of their mobile marketing efforts. ROAS – (Return on Ad Spend) is a simple metric to show how marketing spend is recouped and ultimately delivers a financial return.

The problem with simplistic ways of measuring ROAS (or ROI) is that it doesn’t always take into account time, and marketers have been missing the importance of factoring in time into their calculations, and thus making suboptimal spend decisions.

I was recently at a gaming conference where I met two UA managers for gaming studios who were comparing their respective ROAS performances. The first studio was pleased with their 130% ROAS figure, but not as pleased as the second studio, which was achieving 140%. The problem of course is that they were not factoring in time. 

The genres of games were very different – the first game was hybrid-casual with aggressive early monetization but where users were not expected to play for more than a couple of months at best before exhausting all the content and tiring of the gameplay.

The second studio had created a merge game, loved by many loyal fans, but because of the competitive nature of the genre and high user acquisition costs, the payback period was much longer before any profits were generated.

Turns out the first studio was making a 130% ROAS (30% ROI) on their ad spend after 30 days, whilst the second studio was taking a full 2 years to achieve their return of 40%. They needed to look through the headline metric and understand the time value of money and the financial profiles of how their investments were performing.

Now part of this problem is structural – there is a fundamental lack of financial understanding by UA managers and also a lack of education offered to them. 

Most often UA managers set ROAS targets as a primary KPI. Now, some would argue that they are looking at d7 ROAS, d30 ROAS or longer-term targets for making investment decisions based on knowledge of how users behave historically. However there is typically a big disconnect between finance teams and UA managers and a lack of understanding of each other’s core function.

As an informed UA manager I want to know the financial performance of my cohorts, and to do this I need to think more closely about time.

The simplest way to factor in the value of time is to use a metric we’ll call mROI – monthly ROI. It’s easily calculated by taking the profit a cohort generates (LTV minus CPI) and expressing it as a percentage, dividing by the number of days it took to achieve the LTV and multiplying it by 30 to give a monthly estimate.

So in the example above, the hybrid casual studio has an mROI of 30%, whilst the puzzle game studio has an mROI of just 1.67%.

Now this is of course a crude – but often effective – metric for evaluating returns, and focuses both UA managers and finance teams on how UA is funded. If I were an investor, what type of UA would I want to invest my capital into?

While the mROI is better than just looking at simplistic ROI in isolation, the mROI metric is imperfect  – as it assumes a straight line, linear monetization profile – in other words, users spending the same amount every day until the ad spend breaks even and the ultimate LTV is achieved. 

Everyone in the business knows this is wrong and not how the world works. So mROI is a good start, but it doesn’t go far enough.

So how can I REALLY understand the financial performance of my UA spend? In order to truly understand performance you need to use a financial metric that considers the time value of money, and also the non-linear monetization profile that your user cohorts exhibit. This metric has been around for a very long time in financial markets and it’s called Internal Rate of Return, or IRR.

IRR takes a series of cashflows – in our world of f2p or subscription apps or games, this is revenue generated from cohorts gradually monetizing – and expresses their financial performance as a rate of return.

The nerdy financial definition of IRR is “the discount rate applied to the cash flows of an opportunity to produce a net present value (NPV) equal to zero”, but you can think of it as an investment yield on your performance marketing activities, much like financial instruments such as deposits, stocks or bonds.

So how do I calculate IRR? Well, you have all the information already to hand from your own data sources such as your MMP. 

Use the IRR function (or its derivatives, XIRR or MIRR) in Google Sheets or Excel – there great popup explainers of how to construct the fundtion. 

The key inputs are a range of dates, and a range of net cashflow values (think cash out to pay for the user upfront, then gradual levels of revenue earned over time as the cash in).

The IRR of each cohort will change as it monetises – and will become smoother the more data you have as the cohort matures.

You can look at IRR at the cohort level, or indeed zoom right out and look at the app/game level, where you can look at everything spent on UA over time, and then everything earned across all monetization channels since the day the app was launched.

I hope that was an insightful deep dive into the IRR metric and would encourage you to consider it in when setting parameters about your UA spend.

A REQUEST BEFORE YOU GO

I have a very important favor to ask, which as those of you who know me know I don’t do often. If you get any pleasure or inspiration from this episode, could you PLEASE leave a review on your favorite podcasting platform – be it iTunes, Overcast, Spotify, or wherever you get your podcast fix. This podcast is very much a labor of love – and each episode takes many many hours to put together. When you write a review, it will not only be a great deal of encouragement to us, but it will also support getting the word out about the Mobile User Acquisition Show.

Constructive criticism and suggestions for improvement are welcome, whether on podcasting platforms – or by email to shamanth@rocketshiphq.com. We read all the reviews & I want to make this podcast better.

Thank you – and I look forward to seeing you with the next episode!