The majority of web shops still monitor their online advertising results using a ROAS (return on ad spend) target. This simply means monitoring whether the ad spend outweighs the realized revenue per sale. The formula for this is:
Revenue (=sales on the thank you page) / Adspend*100% = ROAS.
Below the line
As you understand, a ROAS calculation does not take into account other things related to the profitability of the product sold (margin per product, warehouse costs, transportation costs, etc.) In practice, this is why it happens that products that have a good ROAS are actually running at a loss. Optimizing your Google Ads campaigns based on a ROAS target is fine, as long as you are aware that by doing so you are actually maximizing sales instead of profitability. Is your agency really making the right choices in terms of products and campaign optimizations, and is your best-selling product delivering the most profit?
From ROAS to POAS
To create insight into this, we replace our clients' ROAS strategy with a POAS (Profit on ad Spend) strategy. When calculating a POAS target, the actual profit/profit of the product is taken into account at the product level.
How does POAS work?
This ensures that the ads are actually profitable and that at the product/campaign level you are better able to make choices around scaling up and down campaigns. This insight can reveal that products with a low ROAS still turn out to have an excellent POAS and are therefore profitable.
Smarter choices
The focus on POAS thus ensures that you will make smarter choices with a positive effect on the profitability of your shop. Successful webshops focus on POAS instead of ROAS!
