There’s a popular legend that you’ll still see on places like LinkedIn and newsletter when it comes to ad campaigns:
ROAS.
Or, return on ad spend.
This number makes the reporting dashboard look and feel great, but often time the actual bank account might not always agree.
Simply put you take the amount of revenue generated from an ad campaign divide it up by the amount of money spend on those ads and voila!
You have a quotient of what your ads are returning for every dollar spent.
Except, it’s a complete vanity metric.
It doesn’t predict growth.
And it doesn’t predict profit.
Also, it doesn’t take into account your cost of goods sold. Most agencies and media buyers don’t account for these things.
However, there is one metric that can and it’s POAS, or profit on ad spend.
This equation takes a little more sweat equity to come up with but it’s worth the effort.
Calculating it goes like this:
Revenue from ads X % of profit margin
________________________________
Ad Spend
For example:
Say you spend $100 on ads and it brings back $500 with an estimated profit margin of 50%.
You take the $500 and multiply it by .5 which gives you $250, and then divide by $100 which, gives you about $2.50 in profit for every dollar that’s been spent.
Now here’s where things get interesting because having this kind of data is only useful if you know what decisions can be made with it.
If your margins are pretty stable you could scale that ad campaign.
What is likely to happen is you’ll see an eroding of your POAS, however, the typical exchange is you’ll get more customers.
Which you can then email more offers to and capitalize on these new customers for even more profits.
Now, if your POAS is negative there’s two decisions you can make:
#1 – turn your ads off or…
#2 – examine your entire sales funnel and sort out where the leakage is.
One example is we have a client that runs on Google. Their clickthrough rates, cost per clicks and everything was very stable at scale.
However, their landing page wasn’t converting so we examined their funnel and tested some new elements on the landing page and got that same landing page to nearly double in efficiency.
Their POAS went from $1.50 per new customer to $5.
That’s pure cash in hand and not some mythical number used by media buyers to wow you with.
If you’re struggling with your ad campaigns the first question to ask is are they generating profit?
If so you might be able to scale those campaigns rather than cutting things off.
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