POAS is the newest buzzword on the lips of Marketers and CMOs, but what is it exactly, and why are Ayima using it?
ROAS has long been used by Marketing Managers to measure what is leading to conversions, and the amount of revenue those conversions deliver, but clever marketers at ecommerce giants have started to move towards a new, more meaningful metric; POAS.
Campaigns can still be optimised to a ROAS or ROI of course, but ROAS reporting is only telling half the story. What’s really important when it comes to performance marketing is to drive additional value by using profit-based metrics. POAS is the key to that.
What is POAS?
Whereas ROAS is Return on Ad Spend, POAS is Profit on Ad Spend. Quite simply, it measures how much actual money you make back on your advertising dollars, pounds, euros or yen.
The POAS formula, simplified, means that for each product:
When we expand this out into some constituent parts, the formula is as follows:
Whilst there are definite similarities, these mask enormous underlying differences between the two. Overlaying and optimising towards a POAS metric leads to significant advantages.
How POAS delivers value to your performance marketing
POAS digs more into the numbers but still provides a useful overview of campaign success. Ayima’s philosophy is that when you set the right targets, you win a large part of the fight to build long-lasting success. For ecommerce brands, in particular, this leads to:
- Accurate, data-driven reporting
- Transparency for all stakeholders
- Stronger optimisation at a product level
1. Accurate, data-driven reporting
Whilst ROAS for ecommerce is certainly a better metric to report on than Cost Per Acquisition (CPA), it doesn’t take into account all the costs involved on an item. In this sense, the jump from ROAS to POAS is similar in scale to that from CPA to ROAS; you’re simply adding more granularity, and with granularity comes control.
If you have items or categories that you’re selling at scale but make a smaller margin on, ROAS tends to overstate their returns. Categories with low margins are likely among the most price-competitive, so are more likely to be reporting the highest ROAS, though this is of course a distorted lense of real returns. Whilst a ROAS of 300% can look great in a report, it can hide any number of losses.
2. Meaningful transparency for all stakeholders
By reporting to a POAS metric, marketing teams get the clearest view possible of actual profitability of campaigns. It removes the need for you to rely on a vague concept of “but we spend roughly x amount making these products”. When we speak directly to profit, we’re all singing off the same hymn sheet: Decision-makers to marketers, and vice-versa.
3. Stronger optimisation at a product level
If we expand the actual calculation of POAS across a whole product catalogue, we can see both its granular and holistic aspects:
The above means that POAS takes into account the cost of manufacturing each product (i) in turn, summing it across a whole product catalogue (N). This granularity means that we’re automatically driving our campaigns towards the profit margin for each and every product in order to maximise the whole.
When we optimise towards CPA, we don’t account for the value of each product, meaning that we’re going to spend more of our money selling cheap products, which the majority of the time will have the lowest CPA. In much the same way, if we were to optimise to ROAS we wouldn’t be taking the cost per product into account.
By isolating the profit figure for each product, we turn it into something we can maximise.
When does POAS become a limitation?
No marketing hypothesis would be complete without an examination of the limitations. POAS can be less useful depending on your goals.
If you’ve identified that above all else, new customer acquisition drives the strongest long-term success, then optimising to POAS isn’t going to help you. Likewise with awareness marketing. POAS is about direct response.
POAS is also going to be less useful to ecommerce brands with minimal variance in profit margins; if you have only one product, or you know all products have a 20% margin, you can keep on top of profits fairly easily. POAS is about managing varying margins.
Finally, POAS doesn’t take everything into account. For high-end fashion brands for example, a lot of the cost attributed to a product could revolve around its marketing. It can be difficult to assign a profit margin to a specific handbag or collaborative celebrity range as it’s not just the cost of manufacturing you need to focus on. Nonetheless, we value control and transparency, and this brings us a lot closer to that point.
How are Ayima using POAS?
If you’re a brand that want to calculate and optimise towards POAS, you need two things:
- To pull the Cost of Goods Sold into your product feed on an item by item level
- To install item-level reporting so that we can see exactly which items were sold during a purchase event, and at what price
The first is a product feed solution, the latter a tracking solution. Each is implemented in different ways according to the platform.
Google, for example, allows cost per product to be uploaded directly into the platform, giving you real-time access to POAS, as long as you set it up correctly.
For other platforms, such as Facebook, this isn’t yet possible (though we imagine it will be coming soon). That said, this hasn’t stopped us from setting it up within the reporting and optimisation process. It’s so important to calculate ultimate profit and performance, so item-level tracking is the most important facet here. Later on, you can match the two up.
From here, we optimise rigorously to POAS using hourly bid optimisation and custom-built scripts. We then use the data to inform both our targeting and strategies and ensure our clients make the best possible returns from their marketing.
POAS should be top of mind for ecommerce brands, regardless of whether you operate in the luxury market or sell a vast range of low-cost products at scale.
It provides better reporting both at the granular and topline level, allowing us to optimise towards and maximise profit. It’s a model we’re moving the majority of our clients toward as long as it suits their business goals.
In particular, POAS suits brands with small margins and large product quantities, where driving towards profit from a vast range is your main objective. We set up automated trackers that show cost and profit per product, allowing us to maximise profits and drive spend at a more granular level.
Secondary to that, it’s valuable if you have a lot of variance in your profit margins. If you have one range that’s cheap to make but highly desired, at a product level you want it to carry more weight than one that turns less profit.
At Ayima we focus on Performance, Technology, and Control. We use the perfect blend of talent and tech. If you're interested in speaking to us about how we can drive granular transparency and meaningful measurement for your business, contact our Head of New Business, [email protected]
Performance. Technology. Control.