There’s a popular legend that you’ll still see on places like LinkedIn and newsletters when it comes to ad campaigns: Focus on Return on Ad Spend (ROAS).
This number makes the reporting dashboard look and feel great, but 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 spent on those ads and voila! You have a quotient of what your ads are returning for every dollar spent.
Except, it’s an incomplete metric. It doesn’t predict growth. It doesn’t predict profit. It doesn’t take into account your cost of goods sold. And, unfortunately, most agencies and media buyers don’t account for these things.
However, there is one metric that provides more visibility into the effectiveness of your ads: Profit on Ad Spend (POAS).
It takes a little more effort to come up with but it’s worth it. To calculate it, you take the revenue from an ad campaign and divide it by ad spend.
For example: Say $10,000 in ad spend returns $50,000 in sales, and your profit margin is 50%. Multiply the $50,000 in sales by the 50% (.5) and then divide by $10,000 which gives $2.50 in profit for every ad dollar.
Now, 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 your ad spending. POAS may erode, but you’re exchanging that return for more customers. If you’re providing products or services that have repeat purchases, this is often a very positive tradeoff.
If your POAS is near or below 1.0, there are two decisions that can be made:
#1 – Turn your ads off
#2 – Examine your entire sales funnel for the leak
As an example: a client’s Google Ads clickthrough rates, cost per clicks and other KPIs were very stable at scale.
However, we discovered their landing page may be the problem. So, we tested new elements on the page and ended up increasing its efficiency. POAS went from $1.50 to $5.00 in profit for every ad dollar.
Here’s the part nobody in our industry likes to say out loud: a 5x ROAS looks fantastic in a monthly report, and no agency wants to be the one explaining that a 5x on a 15% margin means you’re losing a quarter on every dollar.
So ask your team what your POAS is. If they can’t answer it, or they don’t know your margins well enough to try, you’re not measuring performance. You’re measuring activity.
And if you want a second set of eyes on the math, we’re happy to run it with you.
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