ROAS - Return on Ad Spend
The Big Thing in performance marketing the last few years has been to target certain Cost of Sale and/or Return on Ad Spend targets.
The idea behind both concepts is that the marketeer aims at a certain return on his ad spend measured in revenue.
As an example, if we spent 10$ no advertising and our revenue is 100$ our COS and ROAS numbers would be as follows
ROAS 1000% (10$ * 1000% = 100$ )
COS 10% (10$ / 100$ = 10%)
Although working on revenue targets is all fine and well when you are selling products with fairly stable Gross Margins, but what if you have widely differing margins over different product groups and SKUs ?
The problem when you have widely different profitability across your product portfolio is that COS/ROAS targets you have on one SKU might not be suitable for another because of the different Gross Margin on said SKU.
In the extreme if you run the same COS targets across your campaigns is that on some SKUs you make zero profit(or perhaps even a loss) because they differ substantially from your average gross profit margin across your portfolio.
You can split up product with different gross profit margins in to different campaigns with different COS and ROAS targets, this can easily grow too large and complex to manage on scale nor is it likely that you can put each individual SKU in its own campaign.
The solution to the above is to move away from optimizing towards revenue and optimize your campaigns against the Gross Profit.
The cutting edge marketeers have moved forward from simple revenue based marketing to optimising towards Profit and customer life time value.
POAS - Profit on Ad Spend
By optimizing our marketing campaigns towards the Gross Profit we can avoid the pitfalls of having wrong COS targets on our SKUs and ensure that all of our sales are profitable and that we are not wasting our efforts on sales that do not contribute to the bottom line.
By feeding gross profit data in to Google instead of the revenue data, Googles algorithms will take in to account the differing gross margins of each individual SKU automatically - instead of us having to split them up in different campaigns and setting different ROAS targets manually.
I don’t care about profits, I just want to grow big
Although optimizing towards Gross Profit might seem counter intuitive in a growth phase in your company, actually it doesn’t preclude you from targeting growth at the expense of profitability.
By feeding google our profit data, we are altering how our precious ad dollars are allocated over our product portfolio compared to optimizing for revenue (because two 100$ items with different gross profit are not treated equal), and thus can stretch our budget further which in fact will boost our growth despite not targeting profitability.
Using kuvio. you can get profitability insights in to all your campaigns in Google Ads.
I am sold, how do I optimize for profit ?
You cannot get by default the profit attribute in to your standard dataLayer that Google and other platforms use to catch the relevant data off your page.
In the past getting the profit data on to the success page and in the dataLayer has involved extensive development work for each individual website.
But, a new better alternative is available. We developed kuvio.io together with the Stockholm based performance marketing agency Bluebird as a tool with which we can easily deploy profit metrics on the success page using only Google Tag Manager and the kuvio.io interface.
Kuvio.io is a enterprise level SaaS software that can in real-time make the profit calculations on each individual order and feed this data in to the dataLayer.
Kuvio.io can take in to account attributes such as a) different shipping methods b) different payment methods c) different VAT rates, and much more.
Check them out at kuvio.io, and drop us a line if you want to hear some more about either kuvio or any other project you might need some help with.