An eCommerce Manager recently posed this question…
“My CFO is saying my spend of 10% is too high, This excludes development, hosting and salaries. Including salaries we’re spending 15%. So what percentage of revenue is your ad spend ―including ad agency fees, any consumer shows and photography?”
TLDR: It depends on your goals and the efficiency of that spend.
Your Goals & Strategy Drive Marketing Spend Decisions
“Too high” (or low) a marketing spend assumes a few things you’d need to be clear on…. but primarily what outcomes you want/need for your company.
10% of sales may sound like a lot of marketing spend, but what if you’ve made the executive decision to grow faster, get more people paying for your product, expand your reach, and increase brand awareness? Unless your Elon Musk, your tweets alone won’t get you there.
If ownership or management’s decision is to ramp growth fast/er, then it may well be fine to spend 10% of sales.
Of course there are generally accepted ratios and expectations for every category, and publicly traded companies are measured on them every quarter.
But some brands, especially earlier stage brands, are willing to run the business “hot” and produce less profits to grow a larger market opportunity, achieve economies of scale, and grow the brand. While its clearly not for everyone, venture financed firms may run at a loss. While we can’t recommend any particular strategy without knowing all the details of a given brand, owner, management team, or investor ―its helpful to first reflect on what your goals are currently and longer term, and make decisions accordingly.
Marketing & Ad Spend Also Depends on the Returns It generates.
A good starting point is to Calculate your “Break Even ROAS” is as follows:
For example, if you have 70% gross margins, and your ad performance produces 1.42x your ad spend, you break even on a ‘gross’ basis.
This doesn’t include staff, consultants, creative development, etc. as Break Even ROAS, just tells you if the ads are making or losing money on their own.
Break Even ROAS begins to answer more narrowly defined questions like “Are our Meta Ads contributing to our total margin volume?
(Note margin volume, isn’t your gross margin ―its the total margin you generate across all sales).
It’s an important question, as it is margin, not revenue, that funds your operational expenses and profit.
Once you surpass your Break Even ROAS, every dollar you earn above this threshold goes to whatever your management decides to match expenses to –staff, agency, creative development, etc.
If your ad features a promotion (like 10% off incentive) you can account for that as well (easy enough, as it reduces sales/ revenue at checkout).
This “business thinking” approach will help you to focus on a few things:
- Dialing in your spend on producing ads, & ad management (agency or internal staff)
- Managing your promotional expense, which reduces your margin
- Your assortment ―that is, “does our average gross margin cut it?” (Is there enough margin given our cost of goods sold?)
Achieving Break Even ROAS is your First Milestone in Succeeding in Advertising Driven Growth
So if you’ve achieved your Break Even ROAS, congratulations! That’s the good news, it’s fair to say you’re at least in the game ―though there is more to do… here’s the checklist for the business
- Achieve a “better than breakeven ROAS that generates adequate margin volume to fund your operations
- Manage and control your operational costs
- Grow your ROAS further to produce more margin which leads to more profits
It’s as “simple” as that, and it starts with Break Even ROAS. If you haven’t achieved that yet, that’s your first critical milestone.
When you have, then the next question that’s perpetually debated.. “How high does ROAS need to be? If you think its always “as high as possible” ―then read on…
What is a Good ROAS in eCommerce?
A good ROAS is one that allows you to grow your business, and to grow your business consistently, you need to grow your margin volume, and your profit volume.
Remember these aren’t percentages, this is the total margin and profit your business produces, it represents the total scale of your businesses financial success.
The right ROAS is the one that generates the maximum margin volume, and profit volume for the business.
This point on how to arrive at the ideal ROAS your marketing team should be achieving is very important, and for a simple reason.
As ROAS climbs beyond a point, total volume ultimately decreases.
This is the case, simply because perhaps the number one driver of your ROAS is what you paid for the ads. If you lower your CPC, you lower your spending ―awesome, right?
Once again, the true answer is MAYBE.
Ads are sold via an auction, the more participants bidding, the more the ads cost. The competition tends to be fierce to capture as many clicks as possible in the auction (cost effectively).
This means the bidder who can spend the most on the same click you want, gets more traffic ―the ad platforms (Google, Meta, TikTok, etc) didn’t become the juggernauts they are by accident!
So while you can achieve all time highs in ROAS by spending less per click, you also will ultimately be outbid, as there is often someone who will want the revenue more than you do ―that is, they either have higher margins, or accept lower margins in the short term, to acquire customer and grow lifetime value.
There are, of course, other factors that affect your ROAS including:
- Conversion Rate
- Average Order Value
- Number of Items in Cart (affects AOV)
- Promotion Consumption (lowers margins)
- Engagement / Click rate
You’ll have to experiment with each of these dimensions to a successful advertising campaign to acquire customers profitably.
If you think of yourself as a creative marketer, that’s great. Just remember, knowing and understanding how your creative and clever ideas ultimately do or do not impact the success (and even the viability of your business) makes a big difference to your personal success and to that of your team and company.
Good Luck!
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