We know data can be incredibly hard to understand, and of course, some say very boring sometimes. Please stick with us, we are here to help you figure out how to use data in a smart way. Let the data do the work for you, so you can focus on creating results and not worry about dealing with the data daily.
To do this, we have launched a “Activate Your Data” series, where we provide you with everything you need to know to take your company to the next level using data.
The first guide in our series was how to create buyer personas, and take you through the ways of creating value in your marketing efforts from nailing your buyer personas from the very first go.
This blog will take you through the difference between ROAS and POAS and why we argue that ROAS is something you need to move away from ASAP if you are serious about your marketing performance and advertising campaigns.
ROAS – A dead KPI
People in marketing always like to see themselves as being up to date, and preferably ahead of time and innovative in their efforts to gain an advantage over their fierce competition.
However, a majority of marketers still swear by using the same outdated default metrics, which in the end bring no real value and are at best a waste of time, and at worst hindering your ability to actually make an impact in your business.
You know how everybody always laughs at people using outdated tools, as people did with Internet Explorer for years and years?
Well, guess what. ROAS is the Internet Explorer of marketing KPIs and we are gonna tell you why. We will dive into what to track instead to actually gain value from doing evaluation and analysis of your hard work.
First off, let’s cover the basics before getting into explaining why POAS (Profit on Advertising Spend) is simply a superior metric to the outdated, default, and useless ROAS.
ROAS (Return on Advertising Spend) is a tool for tracking the value of marketing efforts. Simply put – how much do you sell for when you advertise.
It makes sense to think ROAS can be useful for your marketing department or your business in general. I mean, it tracks how much you “earn” per dollar spent on advertising. It doesn’t tell you the actual picture, however. ROAS can tell you how much the marketing efforts increased your revenue. It can not tell you if the campaign or ad actually was profitable, or whether it is something you should repeat again in the future.
But why is it?
Well, ROAS doesn’t track anything other than simply taking money spent on ads and looking at how much you sold for based on this. It does not include other costs like COGS (Cost of goods sold), it does not include shipping, it does not factor in other expenses you might have when selling a product. Simply put, ROAS gives you an incomplete picture of how your marketing advertising budget is performing.
And we would argue it is actually harmful to your business to rely on ROAS to take your decisions and evaluate the success of the campaign. What is the point of relying on incomplete data, when you could have access to complete data, guiding your decisions as a marketer.
So why do people still use ROAS?
Like we mentioned before, ROAS is the Internet Explorer of marketing KPIs, it is the default go-to tool. You use it because it works. You use it because you do not have access, or know of better tools. It is comfortable, it gets the job done (not really though), and it is easy to understand and use.
But like all the other browsers out there, there are better tools. When it comes to ROAS, we would argue that POAS should have already replaced ROAS many years ago, but that has not happened yet. The trends are moving towards it, but as we said, many marketers are slow to jump from the sinking ship, that is ROAS.
So why do people still use ROAS?
The simple answer is that businesses do not have the understanding and full picture of their company to use POAS effectively. To use POAS, you need to understand the costs of your products. You need to know how much you paid for the product, or how much it cost to create it. You need to know what you have to pay for things like shipping, packaging, and more.
Many companies simply do not have this information. They do not have a central place with all their data to actually calculate their profit margins from marketing.
This means they cannot effectively use POAS to target or evaluate the goals of an advertising campaign. Basically hindering the work of their marketing departments.
How do I get better data you ask?
Well, short disclaimer, we are a bit biased here. But, a Customer Data Platform, or CDP as people like to call it, contains all this information for you, ready to use in no time. At Custimy.io we created a CDP that requires no technical skills to use. It is made for marketers, and you get to reap the benefits from the very beginning.
Imagine not having to manually analyze and calculate your ROAS, or POAS, but just having a crisp dashboard showing you your actual profits and value created for the business right in front of you. Like so many people never having used anything else than Internet Explorer, it might sound like magic, but it really isn’t. It’s just data and an engine doing the hard analytical work for you.
A CDP like Custimy.io’s can provide you with automated views into your profit margins, so you know which marketing campaigns actually are profitable, and not just the ones driving revenue but no money in the end. It tells you which products are good for your profits, and which ones are bad for business.
By integrating more than 180 other data tools through APIs, a CDP can give you that Google Chrome view of your business, and you can let your competition be stuck on Internet Explorer, even after Microsoft gave up on it and eventually threw it out for good. ROAS should have followed years ago. It’s a dead, outdated KPI, and no marketer with ambitions and respect for themselves should still be relying on ROAS as a metric today.
Having a CDP at hand allows you to make the switch to calculate with POAS, and get started on really understanding your advertising efforts.
The difference between ROAS and POAS
But what is the difference between ROAS and POAS, and why is it so important you ask?
The difference between ROAS and POAS is quite simple. POAS tells you what your marketing efforts bring to the business in regards to profit and income, whereas ROAS only tells you how much your revenue increased. It does not tell you if you actually made or lost money on your campaigns.
Both KPIs are calculated in a different way as well.
While POAS is a bit more complicated to calculate, unless you have a proper data collection tool, ROAS at first seems pretty straightforward.
However, while the break-even for POAS always will be 1.00, and let’s say a 20% profit margin will result in 1.20 POAS, it is very different for ROAS.
ROAS breakeven depends on all the factors that are not included in the initial calculation, which means that the breakeven will be different for every company, every product, and every campaign. You simply can not compare it as easily as with POAS, and you certainly can’t use the knowledge and your learnings from using ROAS to any degree near that of POAS.
Calculating ROAS vs POAS
This is a simplified version of how the difference between ROAS and POAS comes into action. While the ROAS breakeven point always depends on the different situations, products, companies, etc, POAS includes the major costs, giving you a much easier-to-work-with overview of what your actual costs are.
Having the POAS breakeven be 1 consistently also means that it allows for the marketers to have more possibilities to compare their campaigns and ads with other campaigns and ads from their own or even different companies. No hidden external factors muddying the waters. No ROAS there to remove the potential to learn, adapt, and improve.
ROAS is not dying, it is already dead. Making the switch to the better, more useful POAS is really not that difficult. We would argue that it is time to actually see the real value of your advertising efforts.