ROAS vs. POAS: The Shift in Performance Metrics for Your E-commerce Business

Ravid Bareket
May 31, 2023

TL;DR In the digital world of e-commerce, understanding key metrics is essential for growth and profitability. Two primary indicators are often under consideration: Return on Ad Spend (ROAS) and Profit on Ad Spend (POAS). However, there's a common misconception that ROAS is the ideal metric for all e-commerce businesses, but that's not always the case.

ROAS: What's the Catch?

ROAS, representing Return On Ad Spend, has long been considered a crucial metric, but there's a significant caveat here. ROAS is often misunderstood as representing profit, but in reality, it typically signifies Revenue On Ad Spend, a significant different metric. Revenue does not account for critical factors like margins, fixed costs, payment fees, and shipping costs – all of which can significantly impact the profitability of your e-commerce business.
Over time, ROAS has remained a dominant metric because it was the best readily available option, but it comes with pitfalls that could be blocking your business's profitability.

Pitfalls of ROAS as Your KPI

When basing tactics on revenue, including ROAS, you potentially:

  1. Allocate your marketing spend to your highest-priced products, not necessarily the ones with the highest profits.
  2. Risk losing money, either by a decrease in order volume or through individual lower-than-average margin order combinations.

To mitigate the negative impacts caused by ROAS, e-commerce businesses have tried various tactics, like working with an average of product margins, implementing a differentiated ROAS strategy, or finding the highest break-even ROAS and using it as the target. However, all these tactics have inherent pitfalls, from unavoidable money loss on some orders to the risk of closing ads for profitable products with low sales price but high margins.

The Rise of POAS

POAS stands for Profit on Ad Spend and is a more transparent and actionable metric than ROAS. It calculates the gross profit attributable to online marketing channels divided by the ad spend. If your POAS is higher than one, you're making money.

Why POAS is the Better Metric

POAS provides a more accurate reflection of an e-commerce business's profitability. Unlike ROAS, POAS considers factors like product promotions, discount codes, variations in shipping costs, payment fees, and all other variable and fixed costs.
For example, consider an online retailer selling a frying pan and a mixer with considerably varying break-even ROAS. Using ROAS, the marketer might shut down advertising for three out of the four product campaigns. However, with POAS, it's evident that all four orders are profitable!
Even in a situation where product margins are similar, POAS makes it easier to measure and understand real performance, helping you identify profitable orders more effectively than ROAS.

ROAS vs. POAS: The Bottom Line

While ROAS has long been a best practice because it was the best option available, its reliance on revenue rather than profit makes it less transparent and potentially misleading. On the other hand, POAS is a straightforward best-practice that's easy to use and understand. It provides full transparency and helps eliminate guesswork, thereby enhancing the potential for profitability.
It's time for e-commerce businesses to switch their focus from Revenue on Ad Spend to Profit on Ad Spend. By embracing POAS, you'll be better equipped to drive your ad campaigns towards genuine profitability, allowing you to invest your time and budget more wisely.

How Does Kahoona get involved?

When it comes to e-commerce companies, Kahoona's involvement in implementing POAS as a better metric can have the following specific benefits:

  1. Granular Customer Insights: Kahoona's data enrichment offers deep insights into customer behavior and profitability of different segments, aiding in strategic optimization of ad campaigns.
  2. Customer Lifetime Value (CLV) Analysis: Kahoona's tools help assess the long-term profitability of customers, facilitating accurate resource allocation for higher CLV.
  3. Attribution Modeling: Kahoona provides sophisticated attribution modeling, allowing firms to understand the real impact of their marketing efforts and make data-driven decisions.
  4. A/B Testing & Optimization: Kahoona supports A/B testing, aiding businesses in identifying and implementing the most profitable strategies for higher POAS.
  5. Real-time Performance Monitoring: Kahoona's platform offers real-time monitoring of profitability indicators, enabling immediate action to enhance performance.

In summary, Kahoona helps e-commerce companies drive profitability through in-depth customer insights, CLV analysis, advanced attribution modeling, A/B testing, and real-time monitoring, thereby optimizing advertising strategies.