Profit on Ad Spend (POAS) is the newest buzzword on the lips of Marketers and CMOs, but what is it exactly, and why are Ayima using it?
Return on Ad Spend (ROAS) has long been used by Marketing Managers to measure what is leading to conversions, and the amount of revenue those conversions deliver. However, more astute marketers have started to move towards a new, more meaningful metric; POAS.
Campaigns can still be optimized to ROAS or Return on Investment (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?
ROAS is Return on Ad Spend, and 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, is below:
When we expand this out into what broadly makes up profit, the formula is as follows:
Whilst there are definite similarities, these mask enormous underlying differences between the two. Optimizing towards a POAS metric leads to significant advantages.
POAS vs ROAS
Don’t let the similarity of the terms and formulas distract you from the fact that POAS and ROAS are very different models.
ROAS does not take into account the profit margin on each sale, whereas POAS does. This has many implications. If your profits on different products vary significantly, or if your profit margin changes over time, you should almost certainly use POAS.
ROAS may be enough for you if you do not need that extra information. However, you may also be losing money by not adopting it. We will go into some of the benefits of POAS below
How POAS improves 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 optimization at a product level
- Rapid adjustment to change
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 production costs. 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 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 the 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 optimization 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 is a complex way of saying 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 optimize towards CPA, we don’t account for the value of each product. This means that our ad spend will drift to the cheap products because these are the cheapest products to sell. In much the same way, ROAS causes our ad spend to slip towards those items that don’t make us the most money.
By isolating the profit figure for each product, we turn it into something we can maximise.
4. Rapid adjustment to change
Optimizing to POAS also lets you adjust to changing costs over time, letting you optimize towards your peak times.
Your profit from sales might change over time: For example, the profit for each ticket might be entirely dependent upon the total number of tickets sold. Or, your cost of sales might depend upon the changing costs of the raw materials or wholesale prices.
POAS takes this into account. If a good is less profitable, that will be reflect in your reporting, and your algorithms will automatically promote them to retain profitability.
When does POAS become a limitation?
No marketing theory would be complete without an examination of the limitations. POAS can be less useful depending on your goals.
If you’ve identified that new customer acquisition overwhelmingly drives the strongest long-term success, then optimizing to POAS isn’t going to help you. Likewise with awareness marketing. POAS is about direct, revenue-optimized performance.
POAS is also less useful for ecommerce brands with minor variance in profit margins. If you have only one product or you know all your products always 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 POAS brings us a lot closer to that point.
How to set up POAS Marketing
If you’re a brand that wants to calculate and optimize towards POAS, you can set this up on Google by following the below process: :
- Add the cost_of_goods_sold variable into your product feed for each item. This variable should simply be the average price each unit of that product costs you to make or buy. Depending on how you manage your product feed, you may need the support of your developers or product feed managers to do this.
- Make sure this basket-level data has imported into your Google Ads / Search Ads 360 account correctly. This should occur automatically, but to check this, simply add the “Cost of Goods Sold” column in your Google Ads reporting and check that the value appears correct. In SA360, the column will be called “Lead cost of goods sold”.
- If this is not populating, you may need to check that your conversion tags are sending basket-level data such as product IDs. This is what Google uses to find the relevant product in your product feed, so it needs to match your feed. For more information, you can see Google’s documentation on reporting basket-data here.
- Create custom fields in your reports for POAS. You cannot do this with standard Google Ads reporting, but tools that read from the Ads API are able to. Ayima Intelligence, our proprietary PPC tech that layers machine learning over ads accounts, is able to pull this into reports to optimize to spend, for example.
For other platforms, such as Facebook, it isn’t yet possible to import item-level cost data into the product feed (though we think this will be coming soon). That said, this hasn’t stopped us from setting it up within the reporting and optimization process using tools such as Ayima Query. 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 optimize rigorously to POAS using hourly bid optimization 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 at both the granular and topline level. It allows you to optimize towards and maximize profit. It’s a model we’re building out for the majority of our clients 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, get in touch with the team here.