Why ROAS (Return-On-Advertising-Spend) is a good but not the best indication for the success of your eCommerce business and why POAS (Profit-On-Ad-Spend) is the better metric
The term ROAS
ROAS is a subset of ROI (return on investment) and is, in theory, a good indicator for evaluating the success of your eCommerce business. The abbreviation ROAS stands for Return-On-Ad-Spend and describes the ratio of profit achieved to your advertising spend. If the return is higher than your ad spend, you have earned money with your advertising campaign.
Good but problematic
The problem is that profit as a ratio is often not easily accessible, making a true assessment of this ratio difficult. In practice, for this reason, agencies, but also Google, convert the ratio of profit generated to advertising spend into a ratio of revenue to advertising spend instead. And this brings us to the limitation of the reinterpretation of this actually good ratio: it no longer takes into account margins, fixed costs, payment fees, or even shipping costs. In English, the two indicators also blur linguistically from Return-On-Ad-Spend (ROAS) to Revenue-On-Ad-Spend (ROAS). If one is not aware of this, the success of the company may be misinterpreted.
The disadvantages of Revenue-On-Ad-Spend
If you focus your advertising activities on sales, you run the risk of simply advertising the products with the highest price. This would result in an increase in ROAS (based on sales, revenue), but not necessarily in optimal profit utilization. As a result, cash is burned. Examples of this would be losses in order volume or order combinations with low margins.
Why the POAS is the better success metric
POAS, or Profit-On-Ad-Spend, has the advantage over ROAS (based on sales, revenue) that it takes into account costs such as taxes, shipping costs, transactions, etc., adjusts these costs from the sales revenue and outputs them as profit and puts them in relation to the ad spend. With ROAS, it can happen, for example, that a losing business is interpreted as a success because the return-on-ad-spend is high for a high-priced article. If measures for further advertising on Google are derived from this, cash is burned. Since profitability is the focus of the POAS, advertising measures for articles with a good margin would make much more sense.
Case Study: Advertising on POAS instead of ROAS
In this context, it would be interesting to run an advertising campaign on POAS instead of the highest possible ROAS. There is an interesting self-experiment from SavvyRevenue with an amazing result. Thus, the goal was to target the POAS from 1.5x to 2x and to see what kind of influence this in turn has on the profit. The result speaks for itself:
- A sales increase of “only” 11
- Profit increased by 84
This leads to the conclusion that the POAS is actually the more useful metric, albeit one that is more difficult to evaluate and also more difficult to incorporate. However, as the experiment shows, targeting on this metric is promising and profitable.
Conclusion
Most companies use the ROAS (based on revenue) because it is easier to set up. It is inherently more difficult to store the POAS in Google and to run campaigns based on it, but the effort is quickly rewarded and is then reflected in a greater profit. Online commerce (eCommerce) is a fast-moving market characterized by constant evolution. If you want to stay ahead of your competition, you should not use outdated metrics but switch to POAS sooner or later to measure and evaluate success.
