In the ever-evolving landscape of digital marketing, Return on Ad Spend (ROAS) is a metric that has taken centre stage. But, is it truly the golden goose it’s cracked up to be?
In this blog post, we’ll delve into why ROAS might be misleading, and how you can supercharge your online business profits by looking beyond the surface.
The ROAS Mirage
Over the years, I’ve had the privilege of working with a wide array of businesses, with a special fondness for Direct-to-Consumer (D2C) online ventures. These businesses, often raking in seven figures or more, rely heavily on Google Ads and Meta Ads to acquire clients. On the surface, they appear to be thriving in terms of revenue. However, it’s a different story when you peek behind the curtains, into their profit margins. And, one culprit that often plays a role in this profit predicament is ROAS.
ROAS, or Return on Ad Spend, is a metric that seems impressive at first glance. Many business owners proudly proclaim ROAS figures of 3 or 4 for their ad campaigns, believing that it’s a sign of success. But, beware, this can be a major red flag that’s obstructing your path to profitability.
ROAS: The Hidden Profit Drain
Let’s break it down. Say your business is generating £100,000 per month with an average transaction value of £1,000, resulting in about 100 transactions monthly. After calculating the gross margins, you discover it’s approximately 50%. So, your ROAS of 4 might not be as rosy as it seems.
For every £1,000 you spend on revenue, £500 vanishes into product costs, and an additional £250 heads to the Meta or Google advertising platforms. This leaves you with only £250 to cover your overheads and contribute to net profit.
In this scenario, the maximum net profit your business can achieve is a meager 25%, amounting to £25,000, and that’s only if there are no overhead costs, which is unlikely. In reality, overheads might account for around 20% of your revenue, leaving you with a paltry 5% net profit, or £5,000.
So, despite your hard work, you’re only scraping by, achieving a mere 5% net profit.
The primary mistake here is assuming that a ROAS of 4 indicates successful marketing, which, in most cases, isn’t true. To truly gauge your marketing’s effectiveness, shift your focus to calculating the Marketing Cost Per Order.
Marketing Cost Per Order: The True Benchmark
The Marketing Cost Per Order is a more reliable indicator of your marketing’s efficiency. You can calculate it by dividing your marketing spend by the number of orders generated. For example, £25,000 divided by 100 orders results in a marketing cost per order of £250.
Now, armed with this metric, you can clearly see that each order costs you £250 to acquire, which is much more insightful than simply being told your ROAS is 4.
But we don’t stop there. Here are two key strategies to boost your business’s profitability:
1. **Increase Transactions per Customer:** Encourage your existing customers to make repeat purchases. Utilise email marketing, send out personalised letters, make follow-up calls, or ask for referrals. This approach is cost-effective, as it’s often easier and cheaper to retain existing customers compared to acquiring new ones.
2. **Increase Average Order Value:** Consider gradually raising your prices. Contrary to common fears, customers often won’t mind slight price increases, especially if they perceive the added value in your products or services.
The Power of These Strategies
Now, let’s recap how these strategies can transform your business:
– By managing your marketing better and reducing the Marketing Cost Per Order from £250 to £125, you can double your revenue.
– Encouraging customers to make repeat purchases further slashes your cost per order to £62.50. This means you’re getting four times as many orders.
– Gradually increasing your prices by 6.25% over a year can lead to a 25% price increase. This significantly boosts your gross margins.
In this scenario, your business’s revenue jumps from £100,000 per month to £500,000 per month, with a staggering 4,900% increase in net profit—from £5,000 to £250,000 per month.
In conclusion, don’t be lured by the seemingly impressive ROAS figures. If you want to uncover the real potential for profit in your online business, shift your focus to Marketing Cost Per Order. By implementing the strategies outlined here, you can transform your business into a highly profitable venture. If you’re open to new ideas and enthusiastic about change, these methods could work wonders for your business, leading you to not just financial success but also time freedom and generational wealth.
