ROAS vs. POAS
ROAS vs. POAS: Is ROAS (Return On Ad Spend) not the best metric for your eCommerce business? While ROAS has been the go-to metric for many marketers, there’s a more effective and transparent alternative: POAS (Profit on Ad Spend).
Why ROAS Falls Short
ROAS was initially meant to represent the return on ad spend, but it has evolved into a metric based on revenue.
This change creates challenges because revenue doesn’t account for critical factors like margins, fixed costs, payment fees, and shipping costs. Although ROAS was widely accepted as the best practice, it has limitations that can impact your business’s profitability.
The Drawbacks of ROAS
Using a revenue-based metric like ROAS can lead to these issues:
- Allocating marketing spend to high-priced products, not necessarily those with the highest profits.
- Losing money due to low-margin orders or reduced order volume.
- Difficulty in tracking and balancing ROAS targets in case of continuous promotions.
Introducing POAS: The Better Metric
POAS, or Profit on Ad Spend, is a more effective alternative to ROAS.
To calculate POAS, divide the gross profit attributed to a marketing channel by the ad spend.
POAS = Profit ÷ Ad Spend
Advantages of POAS:
- Transparency: POAS allows you to see which campaigns are profitable and which aren’t.
- Simplicity: It’s easier to measure and understand real performance using POAS.
- Comprehensive: POAS accounts for variations in margins, promotions, shipping costs, payment fees, and other variable and fixed costs.
Integrating Profit Data into Google Ads and Facebook Ads
To make the most of POAS, you need to have profit data available in your marketing channels like Google Ads and Facebook Ads.
Create a custom metric on Google Ads & Facebook ads to see which campaign/ad group/keywords/product has brought how much profit and take budget and bid adjustments decision accordingly.
ROAS vs. POAS: The Verdict
While ROAS has been the industry standard, it’s not without its flaws.
POAS offers a more straightforward and transparent approach that focuses on profitability. By using POAS, you can eliminate guesswork and make informed decisions that drive your eCommerce business’s growth. In the battle between ROAS and POAS, the latter emerges as the clear winner.
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FAQ on ROAS and POAS
What are ROAS and POAS?
What is POAS in advertising?
What is the difference between ROAS and CPA?
What is the difference between ROAS and ROI?
How is ROAS calculated?
ROAS = (Revenue from Ad Campaign) / (Ad Spend)
What is a good ROAS ratio?
What does a 300% ROAS mean?
What does 100% ROAS mean?
Is a 100% ROAS good?
What is POAS?
How is POAS calculated?
POAS = (Profit from Ad Campaign) / (Ad Spend)
To calculate the profit, subtract the costs associated with the campaign, such as product costs and other expenses, from the revenue generated.
What is the difference between POAS and ROAS?
What is a good POAS ratio?
How can POAS be improved?
1. Testing and refining ad creatives to increase click-through and conversion rates
2. Adjusting audience targeting to focus on high-value customers
3. Using data-driven bidding strategies to optimize ad spend
4. Improving landing pages to enhance user experience and conversion rates
5. Regularly analyzing campaign performance and making data-driven decisions
Why is POAS important?
How does POAS relate to profit margin?
Interested in learning more about ROAS, POAS, and personalised marketing approaches?
Click here to book a friendly chat with our eCommerce PPC Consultant!
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