How do you calculate and optimize the POAS of a Google Ads campaign?
Measuring the performance of Google Ads campaigns is crucial to ensure profitability and efficiency. Traditionally, many advertisers used ROAS (Return on Ad Spend) to measure the effectiveness of their campaigns. ROAS indicates the ratio of revenue generated from ads to the cost of those ads. While ROAS is a useful metric, it has some limitations. ROAS does not take into account profit margins, returns, cost of goods and other business expenses that affect net income. Therefore, many companies now use POAS (Profit on Ad Spend) as a more refined and profit-oriented metric.
In this article, you will learn how to calculate and optimize the POAS of a Google Ads campaign, as well as some tips to improve both POAS and ROAS.
What is POAS?
POAS stands for “Profit on Ad Spend.” It is a metric that measures how much profit you generate for every dollar you spend on ads. The main difference between POAS and ROAS is that POAS focuses on profit, while ROAS focuses on revenue. POAS takes into account costs such as production costs, shipping costs and any recurring costs. This gives you a much more accurate picture of how profitable an ad campaign really is.
The formula for POAS is as follows:
How do you calculate POAS?
To calculate the POAS of your Google Ads campaign, you need the following data:
- Revenue: This is the total amount you have generated through the sale of products or services as a result of your ads.
- Cost of Goods Sold (COGS): These are the costs you incur to produce the products or provide the services you sell.
- Ad costs: These are the fees you pay for showing ads on Google Ads.
- Other costs: Any additional costs that affect profits, such as shipping, returns, or processing fees. Be sure to read this article on how to reduce these costs.
Suppose in a given month you have €10,000 in advertising costs, you have generated €50,000 in revenue, and the total cost of goods sold (COGS) is €30,000. The profit would then be:
The POAS would be:
This means that for every euro you spent on ads, you generated two euros in profit.
Difference between POAS and ROAS
As mentioned earlier, ROAS is another important metric you can use to measure ad performance. The formula for ROAS is:
In the above example, if the total revenue was €50,000 and the advertising costs were €10,000, the ROAS would be as follows:
This means that for every euro spent on ads, €5 in revenue is generated. But because ROAS does not take into account the cost of goods sold or other operational costs, it can give you a distorted picture of true profitability. That’s why POAS is often a better measure.
Why POAS optimization is important
Optimizing POAS is important because it helps you generate not only more sales, but more profit. It’s not just about how much you sell, but how much you’re left with after deducting all costs. If you optimize your Google Ads campaigns based solely on ROAS, you may find yourself running campaigns that generate high sales but yield little profit because of high production costs or other overheads.
POAS gives you a clearer understanding of the true profitability of your campaigns and helps you make targeted optimizations that contribute directly to your bottom line. Be sure to read this article on maximizing your eCommerce profitability.
How do you optimize POAS?
Here are some strategies to improve the POAS of your Google Ads campaigns:
- Focus on high-margin products
Higher-margin products contribute more to your POAS. If you promote ads for products that have low margins, your POAS may remain low even if you generate a lot of sales. So focus on promoting products where the cost of goods is relatively low compared to the selling price. - Segmentation of campaigns
By dividing your campaigns into different segments, such as by product category, price range or profit margin, you can more accurately track which segments contribute to higher POAS. This makes it easier to allocate budgets to the campaigns that generate the most profit. - Using bidding strategies focused on profit
In Google Ads, you can use different bidding strategies, such as Target ROAS or Target CPA. But if you use POAS as a guide, you can consider adjusting your bids according to actual profitability. For example, for higher-margin products, you can bid more aggressively because they are more profitable. - Optimize landing pages and conversion rates
A good landing page that is optimized for conversions can help you generate more profits without additional advertising costs. The higher your conversion rate, the more sales you make without additional ad budget. - Reduce COGS and operational costs
If you can find ways to reduce the cost of goods sold or other operational costs, your POAS will improve. This could mean negotiating better deals with suppliers or implementing more efficient logistics processes.
Example of POAS optimization
Suppose an e-commerce company advertises two different product lines. Product A has a higher profit margin than product B, but product B sells in higher volumes. The ROAS for both products is 5, meaning that for every euro spent on ads, €5 in revenue is generated. Based on ROAS, it seems like both products are performing well, but when you calculate POAS, it turns out that Product A has a POAS of 3 and Product B has a POAS of 1.5. This means that Product A is significantly more profitable despite both products generating similar revenue.
By adjusting ad campaigns to focus more on Product A and less on Product B, the company can increase its overall POAS and generate more profit with the same ad budget.
Calculating and optimizing POAS is essential for companies looking to align their Google Ads campaigns with profit, rather than just revenue. POAS provides a more accurate picture of the true value of ad spend and helps advertisers make strategic decisions that improve their bottom line. While ROAS is still a useful metric to measure revenue performance, POAS provides the extra layer of profitability essential for sustainable growth. By promoting high-margin products, segmenting campaigns and adjusting your bidding strategies, you can optimize POAS and maximize your business profits.
Be sure to read the following articles
- How do you calculate and optimize the POAS of a Google Ads campaign?
- How to Improve the Quality Score of a Google AdWords Advertisement and Landing Page
- The Google AdWords Auction Mechanism: How does it work and how can you optimize it?
- What is Google Ad Rank and how can you optimize a campaign?
- How Google AdWords rates are calculated and how you can lower them
- How to calculate the cost of a Google Adwords campaign
