Minimizing costs is a bit hard, especially when you need to provide a product with good quality, Isn’t it?
But understanding your costs and profit per item will help you ensure that your pricing is competitive without pricing products too low for your business to survive. Although, in running a business you also need to consider what could be the best key performance metric.
In this article, you will gain more understanding of why profit per order is Important.
Article Content:
- What is ROAS and POAS?
- Why is ‘profit per order’ important?
- How to calculate profit per order?
- Conclusion
What is ROAS and POAS?
ROAS and POAS are two different key performance Indicators that e-commerce companies use in analyzing their profits.
ROAS or Return on Ad Spend is the amount a business is earning from creating an advertising campaign that generates more profit than the ad cost. In simplest terms, It is a tool to understand ‘how much do you sell when you advertise’.
But based on calculated revenue, It might not show accurate profit and performance because it doesn’t include other costs like COGS (Cost of goods sold), Shipping Fees, and other unavoidable costs making it unreliable to use for evaluating the success of a campaign.
On the Other hand, POAS or Profit on Ad Spend is an alternative abbreviation for the original ROAS as described which is supposed to mean Revenue on Ad Spend.
By dividing the gross profit attributable to the campaign ad cost which must be expected to be higher than 1 that would indicate that you earned. In fact, It is simply a superior metric to improve ROAS that can tell you the results from your marketing efforts with regards to profit or income
Why is ‘profit per order’ important?
Profit per Order is important to know so you’ll be able to ensure that you can cover the basic operating expenses as you sell your product to the public. You can easily make corrective measures to cut costs and increase profit margins without compromising the quality of the product that you are selling. This may help you in making proper decisions on whether to lessen or add costs to adjust the price of your product.
As mentioned, understanding your costs and profit per order will help you ensure that your pricing is competitive enough for the survival of your business in the long run and that basic expenses on the orders won’t exceed the price of the product.
For example, you are selling bags in the market, In order for you to understand the overall success of your business, every customer’s order must help you gain profit. Profit may vary depending on orders which may be due to discounts, shipping fees, and other necessary expenses.
To put it simply, Knowing your Profit per order gives you a more accurate measure of the success of your business.
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How to calculate profit per order?
**Assuming all the costs like tax and shipping are included in the cost of goods sold
Calculating using ROAS and POAS may result in a huge difference in the profit per order. You can always use a service to do this for you.
Using POAS, Gross Profit is calculated by deducting the Cost of Goods sold or the product cost and other costs and fees including shipping fees, discounts, and even gift cards. On the Other hand, Calculating gross profit using ROAS is just by deducting the cost of marketing.
To further understand the difference between ROAS and POAS, the breakeven of both indicators signifies something which is a little bit tricky. ROAS breakeven should be higher as much as possible while POAS breakeven must be great than 1. If the breakeven of POAS is greater than 1 means even revenue that has been generated is profitable. On the other hand, ROAS breakeven can’t be confirmed whether it’s profitable or not but the only thing we can measure is the highest ROAS breakeven mostly it should be near 10.
The formula to calculate the breakeven in POAS and ROAS stands
- ROAS Breakeven: Turnover/Revenue/Ad cost
- POAS Breakeven: Gross Profit/ Ad Cost.
Conclusion
ROAS and POAS differ in several ways.
POAS tells you how much your marketing activities have brought into the business in terms of both profit and income, whereas ROAS only tells you how much your revenue increased. Nonetheless, whichever you pick as a key indicator It is always important that you are guided by knowing the importance of knowing your profit per order to help you in making accurate decisions as to the pricing of the product you offer without sacrificing its quality.
References:
https://profitmetrics.io/blog/roas-vs-poas
https://smallbiztricks.com/difference-between-roas-and-poas/
