In 2022, it was the promise of online advertising: Profit on Ad Spend(POAS), a dedicated strategy to help drive your campaigns based on profit. But has POAS delivered on its promise? And does it fit your business? We find out how POAS best fits into the online marketing strategies of 2024.
ROAS vs. POAS: what's the difference?
POAS is the successor to ROAS. Within Google Ads and other online campaign tools, ROAS is now a household word: Return on Ad Spend. ROAS gives business owners insight into the extent to which they have earned back every euro invested.
Let's keep this simple for a moment, because the reality is quite complex. Since the introduction of Smart Bidding, it is possible to set up campaigns more easily and you can set as a goal that you want to earn back ten euros for every euro invested, for example. If everything is set correctly, after a few weeks you will get an ROAS of 10: every euro invested returns ten euros.
Sounds great, right? ROAS caused Google to place more emphasis on pushing keywords or products that generated the most revenue. This push often resulted in higher order values, increased conversion rates and sometimes even lower CPCs(Cost Per Click). The downside of this was that Google put the focus on products or keywords that might not generate as much below the bottom line for your business .
A transition from ROAS to POAS
In 2022, POAS takes the place of ROAS. The focus shifts from sales to profit. The POAS is useful if you sell many products with varying profit margins. The following example shows well why POAS was preferred over ROAS.
You have two towels, which we have given a very premium price tag for the sake of this example. Towel 1 is made of cheap cotton and low quality, the purchase cost is €22.50 and the retail price is €45. Towel 2 is made of really premium quality cotton and has a special finish. The purchase price of the towel is €25, the selling price is €52.50.
As it turns out, your customers are more likely to buy the cheaper towel. On the contrary, the quality towel, which yields more, converts worse. The click price is the same for towel 1 and 2: €0.15.
When we sell 5 towels in this example, we see that the ROAS is higher with towel 1, the POAS is higher with towel 2. So we want Google to push the more expensive towel 2 more, because this towel is more profitable.
How did the POAS strategy work in practice?
Therefore, the Google algorithm had to shift focus and relearn which products were more profitable, which took a lot of time. Another disadvantage was that products that were selling well would suddenly sell worse overnight. That was sometimes disadvantageous, because you might have just invested heavily in the inventory of those products because they were selling well before.
ROAS and POAS in 2024: the rise of the bucket strategy
To overcome these problems, we are now seeing a new flavor of POAS: the bucket strategy, where you put products into "buckets" based on their margins. At Tomahawk, SEA marketers apply a similar strategy. For business owners who want to switch from ROAS to POAS, we recommend putting margins by product in Channable. This is easy to do by running a weekly import of the purchase price per product from ERP systems such as Exact. With that information you calculate the margins.
Then we write the rules to divide all the products into buckets, setting a lower target ROAS for higher-margin products. With this method, we sort products into so-called buckets based on how many clicks they get, what the clicks cost and what they generate. In this way, we can scale up at a leisurely pace and ensure that the entire operation becomes extra profitable, in a scalable method.
It depends on the number of monthly transactions how many buckets we can use. For example, for one customer we kept the hero/sidekick/zombie/villain distribution. Hero products, which therefore have high margins, we could highlight extra with push campaigns. At the same time, we could ignore the villain products, because we knew they would not bring in much below the line.
Is POAS the right choice for your business?
POAS is not the one size fits all solution for all entrepreneurs. In addition, something that was booming two years ago is now less relevant. Left and right you are being overtaken by competitors with more effectively tuned campaigns.
POAS is a solution for business owners who sell products with product margins that vary a lot. If POAS is not right for your business, you are still in good hands with Tomahawk. Our specialists develop the ideal solution for each situation, in close consultation with the customer. POAS is just one of the many strategies available in the field of online marketing.
Wondering if POAS is what for your business? Get in touch and we'll look at the possibilities together!
