What is Profit on Ad Spend (POAS) and Why You Should Be Aware of It

E-Commerce

Explaining Profit on Ad Spend (POAS) and How It Can Define Your Success

Profit on Ad Spend (POAS) is a critical metric in digital marketing that measures the actual profit generated by ads after all associated costs. These include product costs, shipping, and operational expenses, which are deducted. Many marketers pay close attention to Return on Ad Spend (ROAS), which focuses solely on revenue and can therefore be flawed. Hidden costs can go missing and the actual profitability of an item or campaign can become less clear. POAS gives a much clearer picture of whether your advertising spend is truly leading to profits.

Wait, how are POAS and ROAS different?

ROAS is calculated like this:

When a business spends $1,000 on a product, and brings in revenue of $2,000, its ROAS is 2, as it brings in $2 for every $1 spent.

POAS is calculated like this:

When a business spends $1,000 on ads and generates $2,000 in revenue, POAS is calculated by considering the profit, not just the revenue.

If the profit after deducting costs is $1,000, then the POAS is calculated as follows:

Simply put: POAS = (Revenue – Cost)

This means the POAS is 1. For every $1 spent on advertising, the business generates $1 in profit. So a POAS of 1 indicates a business is breaking even, generating no profit, but also no losses.

ROAS calculates the revenue a campaign brings in, not the profit. This means it misses out on a company’s profit margins and returns.

What are ROAS’s limitations?

ROAS can miss several key metrics that affect how a business should judge a project or ad campaign. For example, its results can become inconsistent due to variations in cost and revenue. If a seller sells two products at $100 each, with item A costing $50 to make and item B costing $25, the ROAS of both products would be the same even though product B is significantly more profitable.

Check out this article for more info about ROAS, learn all about it here: What Is ROAS? Calculating Return On Ad Spend

How POAS is superior and why you should track it

Fully understanding POAS is essential for anyone running ads because it allows you to optimize your campaigns for actual profit, not just sales. Businesses that rely solely on ROAS might mistakenly believe they are performing well, only to realize that they are not as profitable as they thought.

Tracking POAS can prevent this mistake, helping you allocate your ad budget more effectively, optimize for profit margins, and grow your business sustainably in the long run. By focusing on profitability, you make sure that every advertising dollar is working harder for your bottom line.

By measuring POAS you always have good oversight of your real profit margins. The cost of goods sold (COGS) and other operating expenses are part of the calculation at all times. This means changes in AOV won’t have a big impact on the overall result. Tracking profit at all times makes sure you understand how much AOV changes affect your bottom line.

Focusing on POAS allows for better understanding on the profitability of advertising campaigns. By directly measuring revenue generated from advertising efforts relative to the amount spent on those campaigns, it paints a clear picture of a campaign’s financial performance. Knowing the ratio of revenue earned from the ads, compared to the total cost of the ads can give advertisers more insight into their results.

What does tracking POAS look like in practice?

Adcore Australia worked with John, an eCommerce business owner who had been focusing on ROAS. Though his campaigns appeared successful with high revenue, John’s profit margins were low. Adcore stepped in and implemented POAS tracking, optimizing his ad spend to prioritize high-margin products. With this strategic shift, John’s profits started growing noticeably, and his business built sustained growth.

By focusing on profit rather than revenue, John saw a significant increase in his overall profitability. His POAS improved, and his business grew sustainably.

What does this mean for businesses?

When tracking POAS, companies can see what they are actually getting out of their advertising investments. Knowing which campaigns are actually generating and not costing money allows for a better ability to allocate resources efficiently. Poorly-performing campaigns can be phased out early on and successful ones can be boosted.

This way, evaluating the performance of campaigns and then allocating budgets become much more streamlined. Measuring POAS regularly can allow a business to maximize its ability to measure and build success.

The impact on eCommerce

Online sellers have to constantly measure the performance of the products they are selling. Slow-moving inventory bloats inventory costs, eating into profit margins. This is why knowing the POAS of a product can be so important. Brands can analyze this data across their catalog and see how each item is performing compared to ad spend. They can then make a much more clear-eyed decision about whether a product should be marketed more heavily, or discontinued altogether.

Continuously monitoring POAS also shows sellers whether previously popular products are dipping in profitability. This makes it much clearer that an item is reaching the end of its product life cycle.

Are you looking for more eCommerce insights? Learn here what a product feed is and how it can upgrade your eCommerce store?

Things to keep in mind when tracking POAS

When monitoring your business’s POAS, it is important that you have a good overview of all your key data points, such as dynamic costs. Tracking this metric effectively requires an accurate and updated understanding of product, packaging, shipping, returns, and other costs. In the dynamic world of eCommerce these factors can be very dynamic with everything from shipping congestion to changes in platform algorithms affecting your bottom line. A product that was highly profitable yesterday can cease to be so tomorrow.

If you need more help with ROAS and POAS, click here to see this guide.

In Conclusion

Tracking POAS can give you far deeper insights into the actual health of your business. Focusing on clear profit instead of just revenue paints a clearer picture of how well you are actually doing. POAS factors in changes in your supply chain or marketing costs, leaving you with a solid understanding of how much money you are actually bringing in from a given venture.

This ability can give businesses a much better ability to decide on whether to invest and where to cut funds. That way, marketing campaigns and products that aren’t performing adequately can be phased out, and top performers can be boosted.

Brands that want to leverage POAS to the fullest should consider using Feeditor. It provides clear oversight of product feeds, which facilitates calculating margins at the SKU (stock keeping unit) level, while enabling the algorithms of campaigns to focus on dynamic profit margins. Business owners can quickly understand where their listings aren’t optimized and make direct improvements to increase their conversions. Feeditor even offers a free trial so you can try it for yourself.

If you need more help with ROAS and POAS, click here to see this guide.