POAS v/s ROAS: Decoding the right metric for success

Rising advertising costs congruent with the post-pandemic boom of digital brands have had businesses competing for the same eyeballs and wallets in a crowded and heavily competitive market. Among Indian businesses surveyed in a Statista study, 70% mentioned that ad costs had risen by at least 25% year-on-year across most digital channels.

To increase sales and visibility, brands are complementing pricing, product-market fit, competition, and product features with heavy ad spend. Along the way, Return on Ad Spend (ROAS) became the go-to metric to assess advertising performance, as it is a simple metric that analyses how much revenue each dollar spent on ads brings in. However, where advertising costs are on the rise, ROAS fails to paint a holistic picture of the true value of marketing strategies as it only accounts for the total revenue driven by advertising. POAS: Profit on ad spends combines all costs, profits, and the customer acquisition process to provide a better understanding of an ad's impact on the bottom line.

Decoding ROAS v/s POAS

ROAS sums up how much revenue is generated for every rupee spent on advertising. Expressed as a ratio, ROAS is calculated by dividing revenue generated through ads by the total ad spend. ROAS has been used widely in digital marketing but it is often misleading as it doesn’t factor in the overall profitability.

At a time when digital ad spends is expected to surpass $10 billion owing to rising ad costs on Google and Meta, it's natural for ROI on ads to decline. While ROAS may show high returns in terms of revenue, it doesn't account for these rising costs. According to McKinsey, Indian businesses struggle to break even despite high ROAS figures as they don’t factor in operational and fulfillment costs. For example, an electronic brand selling products with a low profit margin may have high ROAS figures and still operate under loss owing to exorbitant production costs, not to mention the shipping and inventory costs.

When metrics aren’t fulfilling their outcome, it’s important for businesses to choose one that adds value to their efforts. Profit on Ad Spends (POAS) offers just that. It factors in the profit margins and total costs associated with generating the revenue. POAS is calculated by dividing gross profit from ads and the total ad spends. POAS focuses on the bottom line by factoring in the associated costs of selling a product, reflecting the actual returns from ad campaigns.

In a fiercely competitive market like India, businesses must optimize ad campaigns for profitability, especially when it is a top concern for a vast majority (72%) of businesses. By relying on POAS, businesses can link their marketing campaigns with profit margins, resulting in better decision making and more effective use of budgets. Let’s consider Zomato as an example. The Indian food delivery giant emphasized that in 2024, the company was focused on improving POAS, which led to a 30% improvement in their POAS metric over the last two quarters. The company realized that spending on ads was important but the profitability of it mattered more.

The writing is on the wall: ROAS is no longer a metric that provides an accurate picture of a business' advertising success. POAS, on the other hand, provides actionable insights by accounting for costs. In the year ahead, businesses in India must focus on ensuring the cost of ad spend generates profits, is sustainable and improves the bottom line in the long run. By embracing POAS, businesses will be better equipped to make data-driven decisions that lead to more efficient and agile marketing strategies.