Introduction
ROAS stands for “return on ad spend,” which means the money generated from each money spent on an advertising or marketing campaign. ROAS and POAS are both effective techniques for ascertaining revenue over the cost spent on an advertising campaign. POAS stands “for profit on advertisement spend” and is a minute change of ROAS.
How to calculate ROAS and POAS
ROAS and POAS are both the effective tools of determining the income generated over the cost spend on an advertising or marketing campaign. It is the important concept while evaluating ROAS and POAS. ROAS is high break even variable whereas POAS is transparent. ROAS is easy to calculate as compared to POAS.
To calculate ROAS, the company should know the revenue and cost of the advertising or marketing campaign. After that revenue should be divided by the cost spend on the advertising campaign. For instance, if the company generates Rs. 500000 from the marketing campaign and the cost spend on the advertising campaign is Rs. 1,00000, then ROAS will be 5:1 which implies that the company will generate 5 rupees by spending 1 rupee on advertising campaign.
To calculate POAS, cost of materials should be deducted from the revenue generated by the company on advertising campaigns which Is gross profit of the firm. Gross profit should be divided by the cost spend on the advertising campaign. Some of the general cost of material includes discount, free shipping fee, gift cards etc. For instance: if company generates Rs. 5000 from an advertising campaign and the cost spend on the advertising campaign is Rs. 1000 and the cost of material is Rs. 3000, then Gross Profit of the firm will be Rs. 2000 and the. It will be divided by the cost i.e., 1000 and hence POAS will be 2:1 which implies that on every 1 rupee, company will generate a return or profit of 2 rupee
ROAS or POAS: Which is more effective?
Is profit bidding effective? ROAS and POAS are both the tools for determining and ascertaining the income generated by the company over the advertising cost. ROAS is always good if it is more than 1, it signifies that higher ROAS means more revenue generated from the cost spend on an advertisement. ROAS is easy to calculate as compared to POAS. Laymen can easily calculate ROAS and then immediately eliminate the advertising campaigns which are generating low revenue.
ROAS stresses on the revenue generated from the advertising campaign but it is true that not all advertising campaign generates revenue. It has been rightly said that ROAS is not transparent as it ignores some of the factors while calculating the income of the business. On the other hand, POAS is the evolving technique used to ascertain the actual return earned by the business on advertising campaign. It considers all the relevant factors which affect the return of the firm like cost of materials which is include in calculating ROAS. ROAS has basic assumption that every advertising campaign would generate similar profit for business. It can be traced down those businesses still prefer ROAS over POAS because calculating POAS is time consuming if the margin differs.
Conclusion
ROAS and POAS both are the important techniques but POAS is more effective as it provides the actual return earned by the business and considers all the important parameters in ascertaining the return. Irrespective of the fact that ROAS is widely accepted by the business but POAS will be an evolving tool in e- commerce as it provides the explicit picture of the profit earned on the advertising campaign.
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