If you are a business owner you have come to realize that there is a major disconnect between your marketing team and what makes it to the bottom line on your P&L. Let’s face it, if you have hired a person to head up your marketing efforts (whether he or she is in-house our at a firm) you have probably had a difficult time getting the word “profit” into their vocabulary. Your marketing team means well but at the end of the day the buck stops with the business owner and navigating the world of marketing is very difficult in today’s dynamic environment. One term that your marketing team will bring up is Return on Ad Spend (ROAS). It is simple, take the revenue you generated from your marketing campaign and divide it by the cost of that campaign and whaalaaaa….ROAS. The problem with using ROAS as a metric is that the number is easily manipulated and can easily be inflated. For example, if I want to look good for my boss I could run an e-commerce campaign that gives a bigger discount – customers react, revenue goes up and so does my ROAS (assuming my campaign cost did not go up as well). So I look like a marketing genius because the company revenue went up and so did my ROAS, BUT the margin was destroyed and the company lost money. Most good marketing efforts will see a ROAS of 4:1 or higher.
As a business owner it is more important to calculate POAS* – Profit On Ad Spend. In an ideal world you would calculate POAS* for every campaign. If you are a small business owner this is not realistic; however, at a very minimum you should calculate it on a per platform basis – Email Campaings, Ad Words, Facebook Ads, etc. To calculate POAS* look at your historic ROAS or goal ROAS and incorporate your gross margin (you can also do net margin). Below is a very simple example.
Let’s say our email provider is $1,000/month and we generate an average of $5,000 in revenue per month. $5,000 Revenue/$1,000 Cost = 5; or 5:1.
Our gross margin after COGS is 30%. $5,000 Revenue * 30% Margin = $1,500 Gross Profit.
Now, remove the cost of the campaign. $1,500 Gross Profit – $1,000 Cost of Service = $500 Profit.
Now, calculate POAS*. POAS* = $500 Profit/$1,000 Cost of Service = 0.5 (or 1:2). For every $1 I pay for this campaign I yield $0.50 in profit.
This is a significant difference from the 5:1 on ROAS. This is important because your marketing team will come to your office and tell you how they are crushing it and to open up more marketing budget because the sky is the limit. Depending on your profit goals and marketing goals you may want to continue on this route, find a new email provider or negotiate a better contract. Using this additional benchmark will help you make better informed decisions based on the real data at your fingertips.
*POAS is a trademark of Fortus, LLC.