It goes without saying that understanding the metrics that define success is paramount for any business aiming to optimise their ad spend and increase profitability.
One such metric that has been gaining attention is Profit on Ad Spend (POAS). Unlike the more commonly used Return on Ad Spend (ROAS), POAS provides a deeper insight into the profitability of advertising campaigns by focusing on actual profit rather than just revenue. So, we’re going to explore the concept of POAS, its importance, how it differs from ROAS, and how businesses can effectively implement and benefit from it.
Let’s jump in…
What’s the difference between POAS and ROAS?
To fully grasp the significance of POAS, it is important to understand how it differs from ROAS. ROAS is calculated by dividing the total revenue generated from ads by the total advertising costs. It is a measure of the efficiency of an advertising campaign in generating revenue. However, ROAS does not account for the costs involved in producing the goods or services sold, which means it can provide a skewed picture of the campaign’s true profitability.
POAS, however, is the actual profit generated from the advertising efforts. It is calculated by dividing the gross profit (total revenue minus the cost of goods sold) by the advertising costs. This metric provides a clearer and more comprehensive picture of how much profit is being made for every pound spent on advertising. By focusing on profit rather than just revenue, POAS offers a more accurate reflection of the financial success of advertising campaigns.
ROAS: Total Revenue ÷ Advertising Costs
POAS: Actual Profit ÷ Advertising Costs
How to implement POAS in your advertising strategy
Implementing POAS involves a bit of upfront work, but it’ll be worth it. Here’s where to start:
Determine Gross Margins: The first step in calculating POAS is to determine the gross margins of your products or services. This involves calculating the difference between the internal costs (such as production, shipping, and any other relevant expenses) and the selling price. Understanding your gross margins is essential for accurately calculating the profit generated from your advertising efforts.
Assign Gross Margins to Ads: Once you have determined your gross margins, the next step is to assign these margins to your ads. This can be done using tools like Google Click ID in Google Ads (switch Auto-tagging on here!), which allows you to track and analyse the performance of individual ads. By assigning gross margins to specific ads, you can gain a more accurate understanding of which ads are generating the most profit.
Set POAS Goals: With a clear understanding of your gross margins and the performance of your ads, you can set specific POAS goals for your advertising campaigns. Google’s bidding strategies, such as Target ROAS, can also be adjusted to focus on profit margins as well as revenue.
Optimisation. What’s next with POAS?
You’ve implemented your POAS strategy, and now it’s time to optimise. Key areas to include are:
Bidding: By focusing on both revenue and profit, you can develop more effective bidding strategies that maximise the profitability of your ad spend. This involves adjusting your bids based on the profit potential of different keywords and ad placements.
Ad Messaging: Tailoring your ad messaging to target profit returns can significantly improve the effectiveness of your advertising campaigns. By highlighting the value and profitability of your products or services, you can attract more high-value customers.
Landing Pages: Optimising your landing pages for user experience can increase conversion rates and, consequently, the profitability of your advertising campaigns. This involves creating landing pages that are easy to navigate, visually appealing, and provide clear calls to action. Giving Conversion Rate Optimisation (CRO) a slice of the annual budget means you can squeeze as much out of your advertising spend as possible.
Keywords: Identifying and prioritising profitable search terms can help you attract more high-value customers. This involves conducting thorough keyword research and focusing on terms that have a high profit potential.
Products: Investing more in high-margin products can significantly increase the profitability of your advertising campaigns. By focusing your ad spend on products that generate the highest profit margins, you can maximise the return on your investment.Benefits of using POAS
The primary benefit of using POAS is that it provides a more accurate measure of the profitability of your advertising campaigns. By focusing on actual profit rather than just revenue, POAS allows you to make more informed decisions about where to allocate your ad spend. This can help you maximise the return on your investment and increase the overall profitability of your business.
Additionally, POAS provides a clearer understanding of the financial success of your advertising campaigns. This can help you identify which campaigns are generating the most profit and which ones need to be adjusted or discontinued. By focusing on profit rather than just revenue, you can develop more effective advertising strategies that drive long-term growth and success.
Early adoption of POAS
Adopting POAS early on can give businesses a competitive edge. As more businesses recognise the importance of profitability for a better picture of financial health, they can stay ahead of the curve and gain a significant advantage.
Does POAS only work for e-commerce?
There’s no doubt about it, POAS is an easier strategy to implement for e-commerce businesses, due to its focus on actual profit generated from advertising. However, it is not exclusively limited to e-commerce. Essentially, any business investing in digital advertising can benefit from using POAS, including service-based businesses and B2B companies, as long as they can calculate their gross profit margins and have a system in place to attribute this back to their advertising campaigns.
Conclusion
In conclusion, shifting the focus from ROAS to POAS can often improve the profitability of your campaigns. By providing a clearer understanding of the true financial success of your ads, POAS allows you to make more of the informed decisions you need to scale!
If you’re feeling overwhelmed then don’t worry, we’re here to help. Imagine us as your outsourced, in-house lead generation agency. We bring the expertise of seasoned consultants and the commitment of an in-house team. So, if you’re ready to make the most of your PPC budget, let's chat.