I usually encounter 3 types of eCom business owners:
a) Those who want to get the highest possible ROAS,
b) those who want to maximize their revenue
c) and finally those who are looking for a sweet spot between those two metrics.
Their targets depend on their business objectives. The first type usually has a small business and they want to get as much ROAS as they can without putting extra pressure and expenses onto their balance sheets. They are usually starting in eCommerce and managing cash flow is their top priority. That is actually a good strategy for someone who just wants to ‘test the waters’ with eCommerce and not risk too much, but it is not something that can be scaled and maintained long-term.
The second type cares mostly about maximizing revenue. I oftentimes got on calls with owners of 8-figure and even 9-figure eCom businesses who said to “…Just spend as much of the budget as you can on breakeven.”
How is that possible?
There are two main reasons some of the big players have this kind of approach.
Firstly, they know that if they use Facebook to generate ‘free’ traffic, they will be able to cash it out with other channels like organic, email and even bring bricks-and-mortar and wholesale sales. This becomes even more significant if you understand that those businesses think about Facebook in terms of acquiring a customer to keep him for the long haul. This is contrary to most of eCom owners, who oftentimes focus on acquiring a new customer, but then totally forget about having the right retention strategy in place to maximise lifetime value.
Another one of eCom owner’s reasons to focus on maximized revenue is to make sure the company shows high revenue in earnings reports. In this case, a higher revenue conveys a high potential to increase profits and it increases the company’s value overall, which may be important if you are planning to sell a business, raise funding, go public etc.
However, most of the eCom business owners are neither small enough to focus on ROAS alone nor big enough to have revenue maximisation as their only objective, and those fall within the third category.
For those, we use the strategy I personally like the most and if you run an eCom store, thinking the following way will really help you optimize for the best business results:
First of all, let’s talk about the variables involved. You need to know the breakeven point for each of your products, all your fixed costs, average order value, average retention rates, and customer lifetime value and revenue from different marketing channels. Ideally, you also know how individual marketing channels affect one another, but this is super difficult to track so let’s leave that out for now.
If you know your REAL breakeven ROAS very well, your target is to find an intersection between the highest ROAS and the highest possible revenue up to the point of diminishing returns. In other words, you scale advertising to grow the spend up to the point at which revenue starts to decline.
Even better, try replacing the idea of the maximum added revenue with maximum added profit. With this objective, you try to maximize ROAS and revenue together up to the point of maximum profit.
It is OK to sacrifice short-term profit if you have high certainty that pushing for additional revenue or testing will increase profits overall within a predefined time window (e.g. next 6-12 months window).
Now we are getting into cash flow and risk-management topics. You may want to keep your profits lower if another variable you consider is the Revenue-to-Expenses ratio. If you know that you can make a higher profit with more revenue and more expenses, but the ratio would be too uneven, this may be too much of a risk if you know that your revenues tend to fluctuate month-to-month.
So, after you consider all of the above variables, you will determine an optimal financial strategy for your marketing.
Now, we do Facebook ads, so I know that for some this sort of financial planning may sound like overkill, but trust me: if we know our client’s expectations very well, we are able not only to deliver Fb Ads but also support their business’ long-term growth in general, which yields a much better outcome for everyone involved.
Hope that helps.
