Implement POAS Effectively: Differences Between POAS, ROAS, and Profit Influenced Bidding

Advertising e-commerce managers can opt for different strategies. They can focus on selling a specific brand, hitting a volume target, or generating as much profit as possible. The last part has created a rising interest in setting up campaigns that focus on profit on ad spend. That is, implement POAS™*. 

We have seen many clients and agencies that want to implement POAS but don’t know how to do it, (or don’t have sufficient data to do it). That is why we decided to host a webinar and write this article on setting up a true POAS campaign, but also to include an easier form being Profit Influenced Bidding (PiB).

The difference between ROAS, POAS, and Profit Influenced Bidding

It’s important first to understand the difference between ROAS (return on ad spend) and POAS (profit on ad spend). They are both easy-to-understand formulas. But let’s take a look at the table below in which you can see a simplified version. 

When you want to calculate the profit on ad spend, you should consider all the product costs, including shipping, production, etc., and deduct those costs from the revenue. As you can see, this will give you an overview of which products are most profitable and where you could spend more on advertising. A big limitation for many PPC specialists is that they don’t have all the data. That’s why we will share multiple ways to come closer to a profit-focused strategy.

Formula for ROAS and POAS

To calculate your ROAS or POAS there is a simple formula, for ROAS it’s the revenue attributed to ads/advertising costs * 100%. For POAS it’s the profit attributed to ads/advertising costs * 100%. 

With the ROAS you could argue that you already take into account the margin as it might be costly to advertise low-margin products. However, you might want to focus on gaining market share. If that’s the case, you might want to grow while not making a profit or accepting a far lower profit margin. 

Personally, I think many PPC specialists are now interested in transitioning to POAS. And one of the main reasons is because they haven’t previously categorized products based on margin levels. With rising CPCs driven by competition from brands like Temu, justifying the higher costs of advertising is becoming increasingly difficult. Additionally, with concerns about a potential recession, some webshops are prioritizing profit over revenue.

If you have all the data to implement POAS this would make sense, however, if you are not there yet, you might want to move to profit-influenced bidding. Profit-influenced bidding is simply using ROAS but taking into account the profit margins. In this case, you don’t use the exact profit margin on every product, but you group products in margin groups to optimise your Google Ad campaigns.

When should you focus on revenue vs profit?

As mentioned above, it should be a strategic decision to focus on profit versus revenue. That being said, I would recommend always making this decision together with the involved commercial managers as switching from a revenue-focused strategy to a profit-focussed strategy can have big implications.

1. Short-term gains: For example, if the board of investors wants to see a higher profit, thus the entire commercial strategy of your webshop moves to a profit focus.
2. Market development: For example, you want to create a huge market share, that being said, you accept a lower profit margin, or even don’t make a profit at all. A great example of this is companies like Temu and Shein that aggressively advertise in Europe.

These are the primary reasons that should impact your decision to focus on profit or revenue. However, there could be more reasons that lead up to this decision. For example, you could choose to focus on revenue if there are many products in stock that take up space but have lower profit margins. They might have higher storage costs and take up space that could be used for other products. Or a PPC specialist might be tempted to implement POAS to show how well this channel performs. However, it’s good to take into consideration that this should be a decision based on a business strategy and not just for one channel as you might create a distorted view and impact business agreements with suppliers. More on that in the next section.

What are the potential side effects when you implement POAS?

You should consider the potential side effects of POAS. To summarize them:

• You might get fewer conversions, but more profit
• Products with a high purchase price and low margin could remain in stock
• You might lose discounts on purchase prices that are agreed with suppliers based on volume, leading to lower margins
• Competitors might target your pricing strategy
• If you instantly implement POAS, Google might think that your ROAS goes from e.g. 500% to 150%, signalling the algorithm that the campaign is not good, causing it to spend less and leading to a lower volume.

POAS or Profit influenced bidding: high-quality data or easy implementation

There are 2 different approaches to switching from ROAS to POAS depending on your knowledge level:

1. Profit-based bidding: At this moment you need more technical knowledge to feed Google Ads’ algorithm with profit value instead of revenue. You could use a POAS solution like Profit Metrics to achieve this. However, it’s crucial to have all the associated costs for products to know the profit. If you want to set up POAS we would recommend watching the part of Nils Rooijmans in this webinar: https://producthero.com/en/profit-on-ad-spend-poas-webinar

2. Profit-influenced bidding: If you don’t have the resources, knowledge, and time to implement Profit-based bidding, our recommendation is to implement profit-influenced bidding combined with Producthero’s Labelizer strategy or wait to implement POAS until Google’s out-of-the-box solution goes live. In the table below you see examples of Google Ad campaign groups that you can use to set up Profit-Influenced Bidding:

Easy way to start with profit-influenced bidding

If you want to start, the first thing you have to do is decide if you have enough volume to split your products into campaigns. Google’s algorithm will work better if you have more data, so that’s why it’s crucial not to create too many segmentations in smaller accounts. If so, an easy way to start with Profit-Influenced Bidding is to create two groups: products with a lower margin and higher ROAS target, and products with a high margin and a lower ROAS target. The ROAS target will balance the cost per click (CPC) with potential revenue from the conversions. Don’t forget that an optimal campaign structure depends on many factors, e.g. the number of products, conversions, budget, and more.

The flaw of Profit-Influenced Bidding

There is a big flaw in Profit-Influenced Bidding. With Profit-Influenced Bidding you create groups of products based on their margin. However, you don’t take into account the true margin of the product and the margin of the products that are bought. For example, someone might search for a dining chair, but they might end up buying an entire set of chairs and a table. With Profit-Influenced Bidding, you would only see the result from the chair and not the entire set. However, there is a way to get more accurate data, and that is by implementing Google Cart Data. Cart data is an extension to your conversion tracking on your website, this enables you to view which items are purchased after someone clicks on your ads.

Moving to a Profit-Focused campaign

If you are already familiar with Producthero’s Labelizer strategy, then you can also apply this to have more focus on profit. By reducing the costs of your underperforming products (Villains) your advertising budget becomes more profitable. Additionally, you could choose to create margin groups within the Producthero platform to increase the conversions on your high-margin products by creating a separate campaign for your Zombies to give them a boost in visibility.

If you want to learn more about automatically segmenting your products, be sure to read these articles about Producthero’s Labelizer strategy and tools:

1. Basics of the Labelizer to force Performance Max to be more efficient
2. Learn to focus on profit: 5 proven Labelizer strategies
3. What to do after setting up your Labelizer campaigns

What happens when I switch from ROAS to POAS (implement POAS)?

When switching to POAS, in Google Ads you will feed the smart-bidding algorithm with profit as a conversion value instead of revenue. Instantently changing the primary conversion action could lead to a big decrease in conversion value. This might confuse the Google Ads algorithm. In the table below you can see what happens when you adjust your conversion values from revenue to profit. For this reason, you have to make more gradual changes. For example, by starting with a product group or a category.

If you don’t gradually implement POAS, the following happens:

1. 🚨 Google Ads will think something is wrong with conversion tracking. This is because the conversion value goes from 10,000 in revenue to 1,500 in profit. But Google doesn’t understand the difference.
2. This results in lower CPCs → lower traffic & conversion ⬇️
3. Profit attribution can differ from revenue. This change alters signals for different products. It can also confuse the smart bidding algorithm (which isn’t that smart 😉).

How to set a ROAS or POAS target?

In a previous article, I’ve described how you can calculate the perfect ROAS target. This article also shows that I took profitability into account. Simply put, setting higher ROAS goals increases profitability. However, this often results in lower revenue because the volume is lower.

In the webinar, Nils Rooijmans explains how you can implement profit tracking using Google Tag Manager (GTM), by creating a custom javascript and adding new conversion actions (which he added as secondary conversion actions. He also uses the image from the article on calculating your perfect ROAS target. Afterwards, Nils shares the results of a case study on a successful POAS implementation which he tested by running an AB test on geo split. You can rewatch the webinar by signing up here. You can find more information about calculating the perfect ROAS target in our article The Perfect ROAS Target for your pMax campaigns.

Our recommendation for moving from ROAS to POAS?

As mentioned before, I think moving to a profit-focused strategy should be a business decision. This is because it can have a big impact on different departments within your organisation. However, it of course also depends on the volume of your webshop, data quality, and available resources. 

If you do have the resources, knowledge, and time to implement it and it fits with your business objectives, then I would recommend implementing it. If you are not there yet, but you do have a business goal of becoming more profitable, then I would advise taking the route of profit-influenced bidding and applying Producthero’s Labelizer strategy to reduce the ad spend waste.

* POAS™ is a trademark of ProfitMetrics