ROAS vs. POAS: Choosing the Right Metric to Drive Paid Digital Ad Performance and Profitability

20 Dec 2024 / Paid Ads

In the world of paid digital advertising, performance metrics guide marketers in optimising campaigns, managing budgets, and maximising profitability. Two key metrics often debated in this context are Return on Ad Spend (ROAS) and Profit on Ad Spend (POAS). While both are essential, understanding their nuances and applications is crucial for aligning marketing goals with business profitability.

What is ROAS?

Return on Ad Spend (ROAS) is a straightforward metric that measures the revenue generated for every dollar spent on advertising. It’s calculated as:

For example, if you spend ₹100 on ads and generate ₹400 in revenue, your ROAS is 4:1 or 400%.

ROAS focuses purely on the revenue driven by advertising campaigns, making it a popular metric for understanding top-line performance. It’s particularly useful for:

• Evaluating campaign efficiency.
• Optimising ad spend allocation.
• Comparing the performance of different channels or campaigns.

What is POAS?

Profit on Ad Spend (POAS), on the other hand, goes a step further by incorporating profitability into the equation. It’s calculated as:

Profit here is determined after deducting COGS and other expenses directly tied to the revenue generated by the ads.

For instance, if your ₹100 ad spend results in ₹400 in revenue but ₹200 in COGS, your profit is ₹200, and your POAS is 2:1 or 200%.

POAS provides a more holistic view of the actual financial impact of advertising, making it ideal for businesses focused on:

• Profitability over sheer revenue.
• Identifying the true ROI of marketing campaigns.
• Ensuring sustainable growth by balancing revenue and costs.

ROAS vs. POAS: When to Use Each Metric

Choose ROAS When:

Revenue Growth is a Priority:

If you’re scaling a business or entering a new market, focusing on revenue through ROAS helps measure reach and engagement.

Short-term Goals are Revenue-Centric:

For sales targets or clearance campaigns, ROAS aligns with immediate financial objectives.

Data Availability is Limited:

ROAS is simpler to calculate and analyse when detailed profit data isn’t readily available.

Choose POAS When:

Profitability is Critical:

For mature businesses or campaigns where margins matter, POAS offers a clearer picture of financial health.

Budget Optimisation is Key:

POAS helps ensure every dollar spent contributes to the bottom line, not just the top line.

Understanding Customer Lifetime Value (CLTV):

When combined with CLTV, POAS aids in long-term strategic planning.

Case Study: Choosing the Right Metric

A mid-sized e-commerce retailer ran two campaigns:

Campaign A: ₹5,00,000 ad spend generated ₹20,00,000 in revenue (ROAS = 4:1).

Campaign B: ₹5,00,000 ad spend generated ₹15,00,000 in revenue (ROAS = 3:1).

At first glance, Campaign A seems superior. However, after analysing costs:

Campaign A had ₹18,00,000 in COGS, yielding ₹2,00,000 profit (POAS = 0.4:1).

Campaign B had ₹9,00,000 in COGS, yielding ₹6,00,000 profit (POAS = 1.2:1).

The retailer decided to increase investment in Campaign B based on POAS, as it drove higher profitability despite a lower ROAS.

Bringing It All Together

Both ROAS and POAS are valuable metrics, but their application depends on your business objectives:

ROAS excels in measuring efficiency and revenue-driving potential, making it ideal for growth-focused strategies.

POAS highlights profitability, helping businesses prioritise sustainable and financially sound campaigns.

The key is not to rely solely on one metric but to balance both, tailoring your strategy to align with your overall business goals. By doing so, you can ensure that your paid digital ads not only perform but also contribute to lasting profitability.

Which metric does your business prioritise? Let’s discuss! Get in touch with our experts today!