What is POAS and how do you calculate it?
For the first several years of online marketing's life, ROAS was used. Everyone knew it wasn't optimal, but it was the least bad metric at the time.
In 2019, people started talking about POAS. POAS stands for Profit On Ad Spend. Loosely translated as "profit on your investment in paid advertising".
But let's look at an example - it can sometimes make it a little easier to understand.
Imagine you sell t-shirts. You buy them for 60,- ex VAT and sell them for 180,- ex VAT.
In other words, you earn 120,- if you sell a t-shirt if you have no expenses. And you do.
Because if we assume you have a conversion rate of 4%. That means you need 100 people to visit the site to get four orders. That also means you need 25 people to get one order. For the sake of simplicity, let's say you only have one item per order. So when you have 25 people on your site, you get one order and sell one t-shirt.
But you pay for these visitors on e.g. Google Ads. Let's say you pay 3,- per click in Google Ads. This means that it costs you $75 to bring 25 people to your site. So when you spend $75 on Google Ads, you sell a t-shirt for $180 and you have a profit of $120-75 = $45.
And this is where the difference between POAS and ROAS comes in. Because your ROAS is calculated on your revenue and your POAS is calculated on your profit.
So ROAS in this case is calculated as follows: 180/75 = 2.4. This means that your ad is running with a ROAS of 2.4. But it doesn't take into account your profit. If your purchase price increases to 80, your ROAS will still be 2.4, but your earnings have dropped significantly. Therefore, POAS is a somewhat better metric.
POAS is calculated by taking the profit of 120 and dividing by 75, i.e. 120/75 = 1.6. So on that you have a POAS 1.6.
If you hit POAS 1, you no longer make money. Therefore, you can easily see if you are making or losing money on your online campaigns if you use POAS instead of ROAS.
The Danish company Profitmetrics works exclusively with helping webshops calculate POAS.
We've been working with online marketing ourselves for decades. As the only shop system in the country, we have spoken multiple times at conferences such as Marketingcamp, SEOday, Shopcamp, Digital Marketing, E-commerce Manager, Ecommerce Day, Web Analytics Wednesday and many more.