POAS: a metric all e-commerce marketers should know

Running a business online is complex, and tracking the success of that business can be even more complicated.

Effectively tracking the right metrics and KPIs is one of the most critical aspects of running a successful online retail business, especially if you're on a tight budget. Every dollar counts.

However, some days, as a marketer, it can feel like there are a million acronyms you need to be aware of. While you don't need to know every term that crosses your path, you do need to stay on top of those that apply to your industry and more company-specific goals. 

Whether it's CRM, CTR, KPI or API, knowing what applies to your business is half the battle — and POAS is no different. This acronym should not go unnoticed. 

POAS? Isn't it ROAS?

E-commerce metrics measure a business's performance and success, focusing on data such as conversion rates, traffic sources, customer acquisition costs, average order value and more. 

All are important, as is return on ad spend (ROAS) and, more recently, profit on ad spend (POAS). These KPIs are a lot like ROI, but specifically for marketing. 

While ROAS may be on your radar, as it can help you determine which ads give you the most bang for your buck, it's not always the best metric. As an e-commerce business, you will (hopefully) make many transactional sales via digital advertising. In these cases, profit margins can be easily calculated, providing insight into where your money will go. 

So, is POAS superior to ROAS when measuring ad performance? Here's what you need to know when planning your next campaign and why it may be time to switch things up. 

What is POAS?

POAS (or profit on ad spend—is an alternative to ROAS, offering digital marketing teams a transparent way to evaluate an ad campaign's profitability. While this metric has been around for some time, it has only recently taken off, creating a unique opportunity for marketers to get ahead of the curve. 

Unlike ROAS, POAS measures the gross profit gained from every ad dollar spend, accounting for costs and profit margins. As a result, you can better understand a campaign's profitability instead of just its revenue, which should help you make more informed decisions. 

To calculate this metric, you need to account for the profit margin on goods/services sold that can be directly attributed to an ad campaign, divided by ad spend.

Here is the calculation:

POAS = (profit from ad campaign) / (campaign ad spend)

For example:

• Campaign A sells "sneaker A," and campaign B sells "sneaker B."
• Sneaker A costs the consumer $200 and $100 to make ($100 profit margin). Sneaker B costs the consumer $200 but $190 to make ($10 profit margin).
• Executing these campaigns costs $10,000 each. Campaign A and campaign B each drove $200,000 in sales, based on 1,000 units sold. 
• For campaign A, the POAS = 10 ($100,000/$10,000).
• For campaign B, the POAS = 1 ($10,000/$10,000).
• The ROAS for both campaigns is 20 based on the following calculation: revenue of the ad campaign / the cost of the campaign ($200,000/$10,000).

The bottom line: With POAS, you will better understand profitability. You can then make more informed decisions to optimize campaigns and allocate budgets more effectively. 

How does POAS compare to ROAS?

There is no doubt that ROAS is a great metric, and it has served marketers well for years. 

Using this metric makes it easy to determine whether you've made money. If the return exceeds your ad spend, you're in the black. However, the "return" or profit is not readily available when dealing with e-commerce analytics. 

Since "return" was unavailable to Facebook, Google and other marketing channels, "return" was swapped out for "revenue." So, when you see ROAS, most often, it now applies to "revenue" on ad spend—which isn't the same as "return" on ad spend. 

Revenue provides little insight into fixed costs, payment fees, margins or shipping costs, all critical factors to consider when running an e-commerce business. While you can apply one of several tactics to minimize the negatives of ROAS (when focusing on revenue), POAS is an alternative that accounts for profit on ad spend, compensating for the shortcomings of ROAS. It is a more straightforward best practice that's easy to use and understand. 

How do these metrics differ?

The main difference between POAS (Profit on Ad Spend) and ROAS (Return on Ad Spend) is that POAS measures the profit you generate per dollar spent on advertising. 

In contrast, ROAS measures the gross return per ad dollar. POAS provides a more comprehensive understanding of your campaigns' profitability, accounting for costs and margins.

So, instead of measuring revenue (the total money generated before expenses), POAS measures profit (the total generated after expenses). ROAS does provide you with valuable insights. However, revenue doesn't necessarily translate to what's in the bank. Your revenue could be high, but you could find yourself up the creek without a paddle if your costs or overheads eat up your profits without much awareness. 

The drawbacks of ROAS (and why POAS is the solution)

If you focus solely on a revenue-based metric like ROAS, you could face the following issues:

• Allocating marketing spend to your highest-priced products (not necessarily products with the highest profits).
• Losing money because of low-margin orders or reduced volume. Results may also be skewed by average order value (AOV) variations. 
• Facing the challenges of tracking and balancing ROAS targets when running continuous promotions. 

The advantages of POAS help remedy the above issues because this metric is:

• Transparent, providing insight into which campaigns are profitable and which aren't. 
• Simple, as it is easier to measure and understand true performance. 
• Comprehensive, as it accounts for promotions, margin variations, shipping costs, payment processing fees, and other fixed and variable costs. 

These benefits help eliminate guesswork so that you can make more informed decisions that drive sustained e-commerce growth. However, you'll need profit data readily available in your marketing channels to make the most of POAS, including Facebook Ads or Google Ads. 

You can use Google Ads' built-in management tools or a marketing data hub like Funnel. The latter is ideal when working with a lot of data across various platforms.

Read more: Why ad spend tracking is a must for every digital marketer

Access to this data will help you see the bigger picture, focusing on what is income-generating and what isn't. With this information, you can focus more on the campaigns that drive profit while stopping or pausing those that don't bring returns. So, as you lessen your ad costs, you'll increase your gains. 

What about the drawbacks of POAS?

As an e-commerce brand, there are instances where POAS may not be very useful, so it is vital to know when and why to use this metric. 

For example, if your company has minimal variance in profit margins, POAS won't be overly helpful because it is about managing varying margins. So, if you only have one product or know that all your products typically carry a 20% profit margin, staying on top of profits can be fairly easy.

While this doesn't mean POAS has no place in your strategy, it is best suited to brands with small margins and large product quantities. You'll want to determine the cost and profit of each product so that you can maximize profits while driving spend at a more granular level.

The other slight downside is that POAS can be slightly more complicated to calculate than ROAS because you must consider all costs associated with your ad campaign. However, if you're already tracking these costs by monitoring metrics like return on investment (ROI) or CLV, POAS is much easier to implement into your strategy. 

Why POAS matters for the marketing department

Access to POAS values and associated insights can help marketing teams grow an e-commerce business, as it improves performance marketing. 

Here's how. 

Data-driven reporting 

ROAS for e-commerce does add granularity compared to a metric like Cost Per Acquisition (CPA), and POAS takes that one step further, increasing control. ROAS does not account for production costs, which can result in a distorted view. 

The bottom line is that POAS can provide more accurate reporting. 

Transparency for stakeholders

When using POAS, you have a clearer view of campaign profitability. Instead of saying, "This is our revenue, but we spent roughly 'x' amount," you can speak directly about profit, which everyone can support, whether it's your marketing team, decision-makers or stakeholders. 

Adjusting to change

Every business needs to deal with changing costs, and POAS can be invaluable during these times. Accounting for POAS allows you to adjust to changing costs across time, letting you optimize for peak sales periods.

Profit can change over time, depending on units sold, the cost of raw materials or wholesale prices, but POAS considers this. You can determine if a product is less profitable in your reporting, allowing you to pivot. You can also take this process one step further, optimizing costs at the product level. 

The link between POAS and your marketing strategy

When you launch any campaign, the goal is to optimize variables so that you can increase profits and revenue. 

You should check on some areas in each marketing platform when using POAS. Then, work toward connecting that data for a more unified view and a single source of truth. 

Consider the following:

• When bidding, focus on revenue as well as profit. Use a smart bidding strategy to lessen ad costs. 
• Is your ad messaging effective? POAS can help you identify which channels, audiences, and campaigns drive profitability. With this knowledge, you should refine your messaging to maximize your ROI.
• Review keywords and search terms your target audience uses. You may find that some keywords help increase revenue but are not as profitable as you initially thought. 
• The same applies to certain products that generate good revenue but not much profit. Invest in more profitable products, spending lower amounts when marketing the less profitable ones. 

The final verdict

There is a reason why ROAS was the industry standard for so long, and it remains a valuable marketing metric, but it's not the only option. 

POAS is preferable in the e-commerce space. It is a more direct metric to track for online marketing campaigns, offering insights that ROAS can't. 

Since POAS is still relatively new to marketers and business owners, changing your strategy today could give you a competitive edge. 

While ROAS and POAS belong in marketing, think of ROAS as an over-easy egg — it's quick to make (when you have the right tools) but may leave you wanting more. POAS is more like eggs Benedict — it takes longer to prep, but the satisfaction is well worth it when you get the result. 

So, if you want to make better decisions and scale your most profitable marketing strategies, it's time to consider POAS.