Why choose POAS target over ROAS?
Google Ads: why choose POAS target over ROAS
The term ROAS is not unknown to Google advertisers. It stands for the term Return On Ad Spend: what you get in return for what you have spent on advertising.
The ROAS that you can choose in Google is, in short, the turnover (or conversion value) divided by the advertising costs. In this article we will explain to you why the ROAS can be misleading and can lead to wrong decisions.
We will also explain why POAS target (Profit On Ad Spend) is now coming into play and why it gives a much better picture of the profitability of your campaign. Next, we’ll also show you how to really get started with POAS.
ROAS goals and target ROAS
But first, back to the ROAS. The ROAS shows what a specific ad group/campaign or even keyword has delivered in terms of conversion value. There is an important difference between a ROAS goal and a target ROAS.
You can define a ROAS goal at all kinds of levels. Sometimes 1 goal is pursued for an entire account. Another option is to set a ROAS target per product category or brand, for example. This way you can have multiple ROAS objectives within a single company.
Target ROAS is another story: that’s Google’s bidding strategy. For example, if you set the target ROAS to 500%, Google aims to generate at least 5 euros in revenue for every euro spent on clicks. If you sell shoes with a turnover value of 200 euros – and that sale comes through Google Ads – then Google may not spend more than 40 euros on clicks.
ROAS: your sales can be misleading
The ROAS (for example 800%) is in fact quite a simple calculation. It is the revenue from advertising divided by the advertising costs x 100%. In this sum you do not take the margin of the ad into account.
For a ‘ROAS Advertiser’ the results of an ad revenue of € 500, ad cost of € 50 and a margin of 25%, therefore match those of an ad revenue of € 500, ad cost of € 50 and a margin of 50%.
According to the above calculation, both advertisements have a ROAS of 1000%, because 500/50 * 100% = 1000%.
Because you treat all products with the same sales price and sales numbers equally by looking at only sales, this has a big impact on bottom-line profit. It may be so that you have nothing left or even suffer losses in the end. I will explain later in this article how that works.
POAS target: why is ROAS shifting to POAS
Let’s explain POAS. Why is ROAS shifting to a POAS target? Well, let me explain. POAS may be a new term, but the method already existed. Some organisations have been steering based on a POAS objective for years. However, most organisations still look at a ROAS objective, simply because it is easier to set up. By placing a special pixel on the site, the turnover can be retrieved from the order confirmation page relatively easily. Profit value will not be shown here, because this is competition sensitive information.
In addition, every organisation calculates the profit value in a different way, and certain important choices are made as to which costs are or are not included. It is also important to mention that most marketers want to maximise sales, and are simply not settled on the basis of a profit target.
Why then the shift? The shift from ROAS to POAS is mainly taking place because the optimisation options within campaigns are increasingly disappearing.
To gain competitive advantage in campaign types such as Smart Shopping, it is therefore increasingly about who can send the best data signals to Google. Is your competitor taking profitability into account and you’re not? Then there is a good chance that you will lose the conversions with the highest profit value. You are then left with the conversion for which you get little value in return, or even incur losses.
So, how to use POAS target?
You can prevent a wrong image of your results by comparing not the turnover, but the margin per advertisement against the costs, and so be able to see the profitability per advertisement. That is the POAS: the Profit On Ad Spent. The POAS is also the profit (better still: gross margin) per ad divided by the advertising costs.
In the example below, you can see how an e-commerce marketer looks at how two different bag ads work, using ROAS and POAS:
Explanation: In the example, A is a brand bag and B is an in-house brand bag. In ad A, the ROAS comes closest to the target and therefore ad A seems to perform better than ad B, where the ROAS significantly deviates from the objective.
You probably would have stopped ad B based on ROAS, while that would be the wrong choice. But if you finally look at the profitability of the ads, you see that ad B (POAS> 100%) actually wins. POAS <100%, in the case of ad A, means that your margin is less than your Ads costs and that you therefore suffer losses.
Important to note: it could be that someone comes on your website after clicking on an ad for a specific product and then buys a different product with a different margin than the product you were advertising with. That is why we also speak of the margin per advertisement.
POAS target: bet on profitable campaigns
The focus on POAS ensures that you will make smarter choices with a positive effect on the profitability of your campaigns. You avoid stopping the wrong campaigns or putting money into campaigns that at first glance seem profitable, but are not.
Is POAS also beneficial for my organisation?
You can determine whether POAS is suitable for you in the following way. For each advertisement, can you easily calculate what you earn from it? If the margin is roughly the same for each product, then you can calculate the margin based on the conversion value at each level (account, campaign, adgroup, etc.) based on Google Ads data.
Please note: other costs (shipping, payment, warehouse costs, etc.) are not included in this, and these are of great impact. For that reason alone, a more advanced method is recommended.
Is there also a difference in your margins per product? Then you can actually always use a different method. Below I explain how you can apply POAS in three steps.
Deploy POAS target yourself in three steps
Depending on your product range, there are different methods to apply POAS. Here I explain which three steps you have to take and which choices you can make within these steps:
Step 1: determine your gross margins
Determine your gross margins. Note: as you can see in the calculation example above: it is important here that you make a distinction between your internal costs and your costs for Google Ads.
That is why we also refer to gross profit data that you send to Google. The costs for Google Ads have also been deducted from the net profit. Because you make this distinction, you ultimately have an even better picture of your profitability.
You can calculate your margins in 2 ways:
1) Calculate your gross margins yourself
Determine the cost items per order and calculate the margin on your orders, for example with Excel.
2) Link data together in a software tool
By linking data from your systems in, for example, ppc management software, you can determine the margin on an order more easily and quickly.
Step 2: Assign your gross margins to your Ads to gain insight into your net margins
Then choose one of the methods below for linking your profit margins:
1) Google Click ID (GCLID)
Create a conversion action in Google Ads to which you periodically send a list of conversions. You define your conversions yourself, and can also include the value (the gross margin in this case).
Provide a GCLID so that Google can assign the conversion to the click associated with a particular ad. So you can calculate the POAS over the advertisement.
2) Set a goal in Analytics
A goal set up in analytics is a trigger that goes off under certain circumstances, for example playing a video, clicking through a link or reaching a certain page, etc.
So you can attach a value to that trigger, and in the case of POAS you attach the gross margin to it. This way your margins can be allocated to advertisements. You can then import the margins from Analytics into Google Ads.
Step 3: Send on the correct data and increase your net margin
Once you have your gross margins in Google Ads, you can use Google’s bidding strategies to increase your net margin. Make sure that only the conversion measure with the margins are included in conversions in the campaigns where you have the bid strategy on.
You can then set a ROAS objective, or rather: a POAS objective. You set this in the same place where you normally set your ROAS. Our advice in this is not to ask too much margin (eg 300% or 400%) from Google, but to stick to a POAS of 120% to 150%.
Note: in the beginning, the bidding strategy will incur quite a lot of money, because it still has to learn. You can adjust the budget here if it is necessary to reduce costs somewhat.
Automatically updating data
You can calculate, record, keep up to date and export the above yourself, but you can save yourself a lot of calculations by using PPC Management Software, which automatically uploads your margins, continuously updates your gross margin column and can exchange large datasets with Google Ads or Analytics.
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