This is part 2 of a 3 part series on Scaling Ecommerce Revenue. Part 1: we are talking simple Ecommerce formulas. Part 2: we move on to identifying scale channels. Part 3: customer lifetime value (LTV) and how to apply to your marketing efforts.
"Scaling a marketing channel." A buzz-phrase that we hear often, but one that is typically over-stated and under-explained. What does this actually mean? Scaling just means spending more $$ on more advertising, right?
Well ... not quite ... not at all actually.
Scaling a marketing channel means increasing volume of that channel, while maintaining a certain level of efficiency. Key word: Efficiency. In this post, we will attempt to explain the performance marketing perspective on scaling, and how to know when you are ready.
The Performance Marketing Approach
"Performance Marketing" is a perspective that can be applied to most any marketing campaign to help determine the usefulness of said campaign. A belief in looking at campaigns through a scientific lens. And although this approach has become more popular thanks to the interwebz and track-ability, it's still not executed properly by many advertisers. As a caveat, this mindset is less relevant to certain executions and campaigns (think long-term relational content), but in most instances, this approach is going to add value to your marketing efforts.
- Create Specific Conversion Objectives (i.e. Completed Purchase, Lead, Newsletter Sign-Up)
- Set Target CPA (Cost per Acquisition) Based on Return on Investment (We'll show you how to set this properly)
- Measure and Optimize to Beat Target CPA
1. Create Specific Conversion Objectives
In order to optimize a campaign properly, we need to set primary and secondary objectives specific to that initiative. For some businesses, this is easy. For example, on an Ecommerce site, a completed purchase will be the primary objective for most any campaign. However, these campaigns should also have secondary or halfway objectives. Popular examples may be a lower-funnel action like an "Add to Cart," or a higher-funnel action like a "Newsletter Sign-Up." For a B2B service company, the most popular objective would be a "lead," while something like a "Newsletter Sign-Up" may be a useful secondary here as well.
Keep in mind, these objectives should not be set by random throwing of darts. Take the time to look through existing data. Which consumer actions most often lead to a great customer? Do newsletter sign-ups actually correlate to an increased purchase rate? Do 80% of users who add-to-cart eventually pull the trigger? Does 5+ minutes on your blog often lead to a long-term subscriber? Look deep enough to find a unique piece of information in your past data, and use that to build your secondary objective. Setting the correct objectives up-front is crucial. If we optimize to the wrong objective, we may end-up right back where we started.
2. Setting and Tracking a Target CPA (Cost Per Acquisition)
Here's the juicy section. Now that we have objectives, it's time to set CPA goals. We need to find two very important things: the current CPA math, and the CPA needed to hit a break-even ROI (Return On Investment... but you guys already knew that one).
The current CPA calculation is a no-brainer: Spend / Completed Objective = CPA. The example below shows a simple table where one can see both channel-specific and overall calculations. In this example, the business is tracking both a top of funnel objective (sign-up) and a lower funnel objective (completed order).
One thing to note. I'm referring to completed order in this example as a CPA metric, NOT an overall CAC (Customer Acquisition Cost). These things are different. A properly defined CAC also takes FUTURE sales into account, typically referred to as the Lifetime Value (LTV) of a customer. We will get into that portion of analysis in our next post.
Easy enough. Now you have a benchmark on past marketing campaigns to work from.
Part two: finding the point of break-even ROI. This is really what it all boils down to, how much can we spend on new customers and maintain profitable growth. In order to do this, we will need two very important things:
- Average Order Value (Revenue / Number of Orders)
- Average Margin (Gross Profits / Revenue)
Average order value will give us a starting point for understanding the value of acquiring a new customer. And average margin will tell us how much of that revenue is actually hitting the bank account. Average margin can widely vary from business to business, which is why you running your own math is super important. In the example below, we used an average margin of 40%. Together, these two metrics give us a break-even point:
Break-Even CPA ($140) = Average Order Value ($350) * Average Margin (40%)
To illustrate this point, let's add this all into our dandy little table from above. I've added columns for the two new metrics, and also added the calculation for current ROI.
Look at that. Our example business is actually showing some signs of life. After going through this wonderful process, we can see that the marketing efforts in this example are already producing some early value. More importantly we can see how each media channel is impacting the bottom line.
Which brings us to the final point.
3. Measure and Optimize to Beat Target CPA
This final point is fairly self-explanatory. Once we have properly set goals, every aspect of our media channels should be optimized with these goals in mind. A couple of tips/examples.
Measure all the way down to the Ad/Creative level. Different creative executions can create shockingly different results. Test new creative across channels regularly, always monitoring which executions are driving results to the set objectives.
Double down on what's working. As mentioned earlier, the goal is efficiency. Efficiency over volume. But once you find a point of efficiency, say a media channel turning a 3.0X ROI. Invest more into that channel! Trust the math, even if your sales cycle is long and it takes a while to see that $$ in the bank.
Seize the opportunities when they exist. When you have a hot channel, squeeze it dry. Don't durdle around. Digital media changes rapidly, so an opportunity today may be gone tomorrow. And this is true across all advertising channels. Competitors enter the market, audience perspective changes, flourishing channels die off. Times they are a changin'. Get your money in good.
Rounding It Up
We've talked too much already, so here are the takeaways in bullet form:
- Scaling is about finding efficiency, not just spending more $$ for more traffic
- Think like a performance marketer, set concrete CPA goals and measure them closely
- Use the process above to find your current CPA and the break-even point for EACH media channel
- Optimize every piece of a campaign with your goals in mind