ROAS vs. POAS: Which Metric Is Best For Your eCommerce Business?


Google Ads: Opting for POAS Target Instead of ROAS

Google Ads advertisers are likely familiar with the acronym ROAS, which stands for Return On Ad Spend – representing what you gain in return for your advertising investment.

ROAS, as selectable in Google Ads, is essentially the ratio of turnover (or conversion value) to advertising costs. This article aims to elucidate why relying solely on ROAS may be misleading and lead to erroneous decisions.

Furthermore, we’ll delve into the emergence of POAS target (Profit On Ad Spend) and why it provides a more accurate depiction of your campaign’s profitability. Additionally, we will guide you on how to effectively implement and leverage POAS to enhance your advertising strategy.

ROAS vs. POAS: Choosing the Right Metric for Your eCommerce Business

When it comes to measuring advertising effectiveness, the debate between ROAS (Return On Ad Spend) and POAS (Profit on Ad Spend) is gaining traction. While ROAS has traditionally been the metric of choice for many marketers, the emergence of POAS offers a more robust and transparent alternative.

The Limitations of ROAS

Originally designed to represent the return on ad spend, ROAS has evolved into a metric centered on revenue.

However, this shift poses challenges as revenue alone fails to consider crucial elements such as profit margins, fixed costs, payment fees, and shipping expenses. Despite its widespread adoption, ROAS has limitations that can impact the overall profitability of your business.

Drawbacks of Relying on ROAS:

1. Allocating marketing budget to high-priced products without prioritizing those with the highest profits.
2. Risking financial losses due to low-margin orders or a decline in order volume.
3. Challenges in tracking and maintaining ROAS targets, especially during continuous promotional periods.

Introducing POAS: A Superior Metric

POAS, or Profit on Ad Spend, emerges as a superior alternative to ROAS.

To calculate POAS, simply divide the gross profit attributed to a specific marketing channel by the corresponding ad spend:

\[ POAS = \frac{Profit}{Ad Spend} \]

Key Advantages of POAS:

1. Transparency: POAS provides a clear insight into the profitability of individual campaigns.
2. Simplicity: Measuring and understanding real performance is more straightforward with POAS.
3. Comprehensive: POAS takes into account variations in profit margins, promotions, shipping costs, payment fees, and both variable and fixed costs.

In conclusion, the shift towards POAS reflects a recognition of the need for a more nuanced and comprehensive metric to gauge the success of advertising efforts in the dynamic landscape of eCommerce.

ROAS Objectives and Target ROAS

Firstly, let’s revisit the concept of ROAS. ROAS, or Return On Ad Spend, indicates the conversion value delivered by a specific ad group, campaign, or keyword. It’s crucial to distinguish between a ROAS goal and a target ROAS.

ROAS goals can be set at various levels, from an overarching goal for an entire account to specific goals for product categories or brands. This allows for multiple ROAS objectives within a single company.

On the other hand, target ROAS is Google’s bidding strategy. For instance, setting a target ROAS at 500% means Google aims to generate at least 5 euros in revenue for every euro spent on clicks. If, for example, you sell shoes with a turnover value of 200 euros through Google Ads, Google won’t spend more than 40 euros on clicks.

Misleading Sales with ROAS

While ROAS, calculated as revenue from advertising divided by advertising costs multiplied by 100%, appears straightforward, it overlooks the margin of the ad.

Consider an example where two advertisements both have a ROAS of 1000% due to the calculation method. However, if the margin of the ads differs, the impact on bottom-line profit becomes significant.

Treating all products with the same sales price and numbers solely based on sales can lead to losses or minimal profit.

POAS Target: The Shift from ROAS to POAS

Now, let’s delve into POAS. Why is there a shift from ROAS to a POAS target? While the term POAS may be relatively new, the method has existed for years, with some organizations steering based on a POAS objective.

Most organizations still prefer ROAS objectives due to ease of setup, utilizing a special pixel to retrieve turnover from the order confirmation page.

Profit value isn’t disclosed due to its sensitivity, and variations exist in how organizations calculate profit.

However, the shift to POAS is primarily driven by diminishing optimization options within campaigns. In competitive landscapes like Performance Max, success depends on sending the best data signals to Google.

Organizations considering profitability in their approach gain an edge, as failing to do so may result in losing high-profit conversions and being left with low-value or even loss-inducing conversions.

The transition from ROAS to POAS is a strategic move to adapt to evolving campaign dynamics and enhance overall advertising effectiveness.

So, how do you implement the POAS target?

To avoid misleading results, it’s essential to assess not just the turnover but the margin per advertisement in comparison to the costs.

This approach enables a clear understanding of the profitability per advertisement, which is encapsulated in POAS: Profit On Ad Spend. POAS is essentially the profit, or more precisely, the gross margin per ad divided by the advertising costs.

Explanation: In this scenario, A represents a branded bag, and B is an in-house brand bag. In ad A, the ROAS closely aligns with the target, creating the impression that ad A outperforms ad B, where the ROAS significantly diverges from the set objective.

Relying solely on ROAS might lead one to pause ad B, but this decision would be misguided. Upon examining the profitability of the ads, it becomes evident that ad B (POAS > 100%) is, in fact, the more successful one. A POAS < 100%, as seen in ad A, indicates that the margin is insufficient to cover the ad costs, resulting in losses.

It’s crucial to highlight that a visitor may land on your website through an ad promoting a specific product but end up purchasing a different product with a distinct margin. This underscores the importance of considering the margin per advertisement.

POAS Target: Investing in Profitable Campaigns

Prioritizing POAS ensures you make informed decisions that positively impact the profitability of your campaigns. This approach helps you avoid halting the wrong campaigns or allocating funds to seemingly profitable campaigns that may not be.

Is POAS Suitable for Your Organization?

You can assess the suitability of POAS for your organization by considering the following. Can you easily calculate the earnings for each advertisement?

If the margin is relatively consistent for each product, you can compute the margin based on the conversion value at different levels (account, campaign, ad group, etc.) using Google Ads data.

It’s important to note that additional costs such as shipping, payment, warehouse expenses, etc., are not factored into this calculation and can significantly impact results. For this reason, a more advanced method is recommended.

If there is variability in your margins per product, you’ll need to employ a different approach. Below, I’ll elucidate how you can implement POAS in four steps.

Implementing POAS in 4 Steps

Here, we’ll guide you through the process of implementing POAS in Google Ads with four key steps:

Step 1: Create a New Purchase Conversion Action in Google Ads to Measure Profit
Initiate the process by setting up a conversion action dedicated to tracking purchases on your website.

Classify this conversion action as ‘secondary’ to avoid reporting additional conversions for bidding, which is typical for primary conversion actions. Include the Transaction ID measurement, crucial for the proper functioning of step 3, where you will inform Google about the conversion value per measured conversion based on the transaction ID.

Utilize Google Tag Manager, a popular method for configuring conversion actions with Transaction IDs (additional information available here and here). The conversion value measured by this action will be ‘profit.’

During the tag/conversion action setup, employ a placeholder for the conversion value, which can be a random number. You will replace it in a later step with the correct/actual profit per conversion.

Ensure that the remaining settings in the conversion action and tag mirror those of your regular primary Purchase conversion action setup.

This secondary action should closely resemble the primary Purchase conversion action, with the only distinctions being its measurement of profit instead of full revenue and its status as a secondary action primarily for observation rather than bidding.

Step 2: Determine Gross Profit per Transaction ID

The subsequent step involves calculating the gross profit per transaction.

Begin by identifying the revenue per transaction (order) resulting from your ads. This step is crucial as many transactions stemming from Ads encompass more products than those explicitly advertised, necessitating careful consideration. Subsequently, ascertain the total cost of these transactions, encompassing not only the product purchasing costs but also additional expenses such as shipping, handling, and payment costs.

With this information in hand, calculate the gross profit per transaction ID by subtracting the total costs of the transactions from the revenue. While manual calculation using tools like Excel is an option, it can be time-consuming and prone to errors.

Adchieve software streamlines this process by automatically retrieving the necessary data and conducting all required calculations. Additionally, it facilitates the subsequent step of uploading gross profits to Google Ads.

Step 3: Upload Gross Profit per Transaction ID to Google Ads

Now that you have determined the actual profits per transaction ID, proceed to upload them to Google Ads. If you’re not utilizing a PPC tool like Adchieve, manual uploading is required, typically done daily, by preparing a spreadsheet with the requisite information.

Using the ‘restate’ adjustment type in your spreadsheet enables you to instruct Google to adjust the conversion value to reflect the actual profit per transaction ID. Detailed instructions on preparing the spreadsheet and uploading it to Google Ads can be found here.

Step 4: Add Custom Columns with POAS and Net Margin to Google Ads

The final step involves adding custom columns to your Google Ads for effective campaign management and optimization based on profitability.

To create a custom column, navigate to: Campaigns → Columns → Modify Columns → Custom Columns → +Column (more detailed instructions available here).

Utilize mathematical operators to define the conditions for the desired columns:

\[POAS = \frac{\text{Conversion value (filtered by Conversion source, select new conversion action)}}{\text{Ad cost}}\]

\[Net Margin = \text{Conversion value (filtered by Conversion source, select new conversion action)} – \text{Ad cost}\]

Upon saving, return to the ‘modify columns’ page, select your new columns, and click ‘Apply’ to incorporate them into your Google Ads reports, allowing for effective monitoring and management based on profitability.

Integrating Profit Data into Google Ads and Facebook Ads

To fully leverage POAS, it is crucial to incorporate profit data into your marketing channels, such as Google Ads and Facebook Ads.

Establish a custom metric within Google Ads and Facebook Ads to assess the profitability brought in by each campaign, ad group, keyword, or product. This will enable you to make strategic decisions regarding budget allocation and bid adjustments based on actual profit metrics.

ROAS vs. POAS: The Conclusion

While ROAS has long been the industry standard, it is not without its limitations.

POAS provides a more direct and transparent approach, prioritizing profitability. By adopting POAS, you can eliminate uncertainty and make well-informed decisions that drive the growth of your eCommerce business. In the comparison between ROAS and POAS, the latter emerges as the clear victor.

Frequently Asked Questions (FAQ) on ROAS and POAS

1. **What are ROAS and POAS?**

– ROAS stands for Return on Ad Spend, measuring the revenue generated per dollar spent on advertising. POAS stands for Profit on Ad Spend, considering both revenue and costs to determine the profit per dollar spent on advertising.

2. **What is POAS in advertising?**

– POAS (Profit on Ad Spend) is a metric quantifying the profit generated from an advertising campaign per dollar spent. It offers a comprehensive understanding of campaign profitability by factoring in revenue, costs, and margins.

3. **What is the difference between ROAS and CPA?**

– ROAS focuses on revenue generated per dollar spent on advertising, while CPA (Cost per Acquisition) assesses the cost of acquiring a new customer. ROAS centers on revenue, while CPA emphasizes the cost to acquire a customer.

4. **What is the difference between ROAS and ROI?**

– ROAS measures revenue generated per dollar spent on advertising, while ROI (Return on Investment) gauges overall profitability by considering total investment costs. ROI provides a more comprehensive understanding of profitability.

5. **How is ROAS calculated?**

– ROAS is calculated by dividing the total revenue generated by an advertising campaign by the total ad spend: \(ROAS = \frac{\text{Revenue from Ad Campaign}}{\text{Ad Spend}}\).

6. **What is a good ROAS ratio?**

– A good ROAS ratio varies, but generally, a ROAS of 4:1 or higher is considered good, signifying $4 in revenue for every $1 spent on advertising. Consider profit margins and business objectives when determining a target ROAS.

7. **What does a 300% ROAS mean?**

– A 300% ROAS implies that for every $1 spent on advertising, the campaign generates $3 in revenue, representing a 3:1 return on ad spend.

8. **What does 100% ROAS mean?**

– A 100% ROAS indicates that for every $1 spent on advertising, the campaign generates $1 in revenue, representing a break-even point.

9. **Is a 100% ROAS good?**

– A 100% ROAS is not ideal, as it represents a break-even point where revenue matches ad spend. A good ROAS should ideally generate more revenue than advertising costs.

10. **What is POAS?**

– POAS stands for Profit on Ad Spend, evaluating the profitability of an advertising campaign by calculating the profit generated per dollar spent on advertising.

11. **How is POAS calculated?**

– POAS is calculated by dividing the total profit generated by an advertising campaign by the total ad spend: \(POAS = \frac{\text{Profit from Ad Campaign}}{\text{Ad Spend}}\).

12. **What is the difference between POAS and ROAS?**

– POAS measures profit per dollar spent on advertising, considering costs and margins, while ROAS measures revenue per dollar spent. POAS provides a more comprehensive view of campaign profitability.

13. **What is a good POAS ratio?**

– A higher POAS is generally better, indicating more profit per dollar spent. Consider profit margins, business objectives, and industry benchmarks when determining a target POAS.

14. **How can POAS be improved?**

– Improving POAS involves optimizing ad creatives, targeting, bidding strategies, and landing pages. Testing and refining ad elements, adjusting targeting, and using data-driven strategies are effective ways to enhance POAS.

15. **Why is POAS important?**

– POAS is crucial as it offers a more comprehensive understanding of advertising campaign profitability, enabling advertisers to make informed decisions and allocate budgets effectively.

16. **How does POAS relate to profit margin?**

– POAS takes profit margin into account, measuring the profit generated per dollar spent on advertising. A higher POAS typically indicates a higher profit margin, reflecting more profit relative to campaign costs.