Why use POAS, not ROAS
Posted on January 19, 2022 (Last Updated: October 12, 2023)
Spoiler alert! Life hack for eCommerce marketing specialists!
In this article, you will learn about an emerging new data-based metric POAS, which will most likely replace its predecessor - ROAS.
I assume, as a reader who is interested in eCommerce, you know what ROAS is and how it is used. But in case you don’t know, let me briefly summarize that.
ROAS stands for Return on Ad Spend, and it helps you to measure whether you generate business on your ads or not. The calculation is simple. You basically take the revenue from advertising and divide it by the ad spend. If the number is higher than 1 - you get more money back than you put in.
Perhaps you have already noticed that in the calculation I used the term “revenue” instead of “return” - and that is what we use in an eCommerce business. The revenue is not transparent and we don’t see many important factors behind it, which could empower us with useful data to run better advertising.
To provide you with the most up-to-date and relevant information, I’ve reached out to Frederik Boysen, the CEO of ProfitMetrics, to hear the definition of POAS and how they implement it for their customers. I must admit, his presentation was overwhelming.
“It doesn’t mean ROAS is a bad metric. But in the past there just wasn’t anything better.”
Frederik Boysen, CEO ProfitMetrics.io
What is POAS?
POAS is short for Profit On Ad Spend and it is used for precise calculations of profitability on ad spend on a product level. POAS is a successor of ROAS and its purpose is to provide a transparent picture of your ads profitability for each product considering all costs and order combinations.
How to calculate profit for POAS?
Well, you need some data for that. Take the turnover (deducted discount, gift cards, free shipping threshold) and deduct product cost, shipping fee, payment fee, and other costs. The result is your gross profit from each order.
What is the difference between ROAS and POAS calculations?
ROAS has a highly variable break-even depending on average margins and it’s untransparent, while POAS break-even is always 1 and that is transparent.
Companies will estimate/calculate which ROAS is break-even for them, it could be 5, 7 or maybe 9. But it will only be an average for the campaign/product category.
How can POAS help you?
“Return on Ad Spend is the right KPI, but in eCommerce we are using Revenue on Ad Spend. And that is where the problem happens because we don’t make the same profit on all products or order combinations.”
Frederik Boysen, CEO ProfitMetrics.io
In some cases you may have a different margin from different products based on order combinations, shipping costs, sales and so on. So let’s say the target breakeven ROAS could be 3,75 (average of all orders). What usually happens in eCommerce is that marketing specialists set the ROAS goal on the products where they make the least money, for example ROAS 6x, while thinking they will never lose money. Of course, they are correct, but what they don’t see is that perhaps 70% of all products are profitable over the ROAS 3. So they are missing out on profitable sales of products with ROAS between 6 and 3.
If you use POAS instead, you will transparently see other costs which also can be variable for each product. For example a heavy table will have higher shipping costs than a pair of headphones because of its size and weight. Also, the difference can be between payment methods. Using PayPal may have different costs than using ApplePay or GooglePay. Considering all these variables you are capable of precisely calculating the profitability of each product.
Thanks to that, you are able to lower the ad spend and focus the bidding on more profitable products. It doesn’t necessarily mean it’s only for those who want to maximize profitability, but perhaps just to have an overall overview of your real Ads performance.
Cross Platform Calculations
If you are using multiple advertising platforms, for example Google Ads and Facebook Ads at the same time, then your calculations within each platform will be incomplete. Ad spend is a conduction from all platforms, but each one will show only the money spent within the given platform and it leads to miscalculation of ROAS and POAS.
You have a turnover of 500€. The profit could be 200€. If you spend 100€ on Google Ads and 100€ on Facebook Ads, and the user interacts with both, the total Ad spend will be 200€, but each platform will show you 100€ only. This will lead to a wrongly calculated ROAS of 5 and POAS of 2, while the true ROAS is 2.5 and the true POAS is 1.
POAS Integration - ProfitMetrics
ProfitMetrics offers a solution that will transform your calculations and allow you to use POAS wherever you need. Its integration is available on many platforms, such as Facebook Ads, Google Ads, Google Analytics, Magento, Shopify, and so on. Moreover, you can see profit data directly in Google Ads.
ProfitMetrics uses both Server-side and Client-side tracking data. It enriches the AI with profit data that teaches algorithms to put profitable products in front of the customers. The platform works with Google Smart Shopping and Google Smart Bidding.
ProfitMetrics can also use data from your WakeupData product feed setup.
Haven’t tried a Product Feed Management platform yet? Book a free trial to learn more!
POAS as a trend in 2022
The world of eCommerce is in furious evolution and new trends are coming every year. POAS, such as a not well-known metric right now, is quite an effective tool that accelerates your business by more effective advertising. There is no doubt that it has great results and big potential in the near future. We are expecting POAS to become one of the trends in the eCommerce business for the following year.
Read our blog about eCommerce trends for 2022 to see what else we can expect this year.