ROAS and POAS®: Are they always the right metrics?

When it comes to measuring the success of your marketing efforts, ROAS (Return on Ad Spend) and POAS® (Profit on Ad Spend) are two of the most commonly used metrics. They are effective in many scenarios, but are they always the right choice? The short answer: not always, or at least not in the way they are typically used.

For some businesses, it’s not possible to generate profit on the first order. In fact, for certain business models, focusing solely on first-order profitability may not be the most optimal strategy for long-term growth. If you’re selling products like mobile accessories, furniture, or similar items, where predicting repeat purchases is difficult (and even if customers do return, they often go through a new research phase), you need to focus on making a profit on the first order. In such cases, traditional ROAS and POAS® metrics can be effective and applied as they always have been.

However, for businesses with a naturally high repeat purchase rate or strong brand loyalty, the story is different. In these scenarios, ROAS and POAS® for new customers aren’t the same as they are for existing customers. It is significantly more expensive to acquire new customers, and if you use the same metrics for both groups, the higher profitability of existing customers skews the average. This makes it difficult to scale your efforts to acquire more new customers without misleading data.

In these cases, separating new and existing customers becomes essential. Enter New Customer POAS®, a metric calculated by dividing the gross profit from new customers in a given period by the ad spend during that same period. This metric provides a clear picture of how much profit you’re generating from acquiring new customers, after accounting for ad spend.

Understanding your New Customer POAS®, combined with your Lifetime Profit Value over 30, 60, 90, or even 180 days, allows you to determine how aggressive you can be in your customer acquisition strategy. It also provides valuable insights into your business’s cash flow requirements to support such efforts.

Imagine your average CPA (Cost Per Acquisition) is €10, blending both new and existing customers. Your average gross profit per order is €15. This gives you a blended POAS® of 1.5, which at first glance looks great.

But upon closer analysis, you discover that acquiring a new customer actually costs €20 on average. This means your New Customer POAS® is 0.75, indicating that you’re losing money on new customer acquisition.

Now, let’s say your POAS® target is 1.5. To meet this target, Google’s bidding algorithms would prioritize bringing in highly profitable existing customers to achieve the desired average. While this might seem like the right approach, it limits your ability to scale because you’re not effectively growing your new customer base.

To answer this question, we need to include Lifetime Profit Value in the equation.

Lifetime Profit Value = Average Order Profit × Purchase Frequency × Customer Lifespan

Let’s extend our earlier example:

When we evaluate POAS® for new customers after each time range, the numbers become much clearer:

As long as your cash flow allows it, targeting a New Customer POAS® of 0.75 and losing money on the first acquisition can be a great strategy, especially when you recoup the loss within the first 30 days. With this approach, you’re not just acquiring customers but laying the foundation for long-term profitability.

Separating new and existing customers in your marketing strategy is a game-changer. It allows you to scale your business more effectively by focusing on accurate metrics tailored to your goals. The key takeaway here is to know your numbers on a profit basis, not just revenue. Margins vary across products, so relying solely on revenue-based metrics can lead to misguided decisions.

In ProfitMetrics, we provide the tools to analyze your performance accurately. Our dashboard splits metrics for new and existing customers, shows New Customer POAS, and tracks lifetime profit over 30, 60, and 90 days, giving you the confidence to scale your business profitably.

By using these insights, you can ensure your strategies align with both your growth objectives and profitability goals. Don’t let blended metrics hold you back, know your numbers, and let them guide your success.