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There’s an old - but new - paradigm for paid media advertising we’ll dive into today, and I’d like to give you a comprehensive way to understand how your business is performing through the lens of paid acquisition. I’ve previously written about the only 3 metrics I think a business owner needs to track given the complexity of a marketing ecosystem: The 3 ROAS to Rule Them All thesis.
I have written about it extensively here (if you want the long version), but don’t worry I’ll break down all three metrics below if you’re more of a Cliff Notes person. On top of that, we have two new additions to address some drawbacks in the initial thesis that didn’t give visibility into the Unit Economics of the business.
Do people still use Cliff Notes…god, I am getting old. Ok, I digress - back to the new Power Five.
While I agree with all of the above, and even more so if you’re using Marpipe for DPA (dynamic product ads), the Power 5 is just tactics to implement, but no way to measure success. If you were hoping to increase the health of your business and if you were acquiring on more channels than Facebook, this list doesn’t do much for you.
Again, these aren’t horrible suggestions. Ok, maybe the mobile-friendly one is (not horrible as in wrong, horrible as in you should have been able to derive this on your own)…but the fact of the matter is, you are left with tactics to implement with no way to know if your business is doing better or worse before you told your boss you were going “to the moon” because you just deployed the Performance 5 from Facebook.
If we move back to the basics, at the core a business owner or head of marketing cares about three things: effectiveness, efficiency, and profits. This was the whole thesis of the 3 ROAS to Rule Them All essay. You need heuristics to measure and approximate the health of your marketing ecosystem.
Now this next part is going to be a quick overview of the 3 ROAS thesis and the metrics. If you are already hip to the game, you can probably skip. On the flip side, Marcus Aurelius’ wrote in his unrivaled Meditations: “We need to be reminded more often than informed.” Stoicism for the win!
“OK Rabah, I’ll bite. If I need to care about effectiveness, efficiency, and profits, what should I track?”
Great question, thanks for asking. ;) The first heuristic is going to be the age old Ecosystem ROAS/MER/Blended ROAS. Whatever you call it is irrelevant, the formula is what matters. It is taking your total revenue divided by your total ad spend. This is going to show you how effective your ad dollars are, agnostic of the channel.
So if you think of your business with three power bars: effectiveness, efficiency and profits. This is the first. Using the screenshot below, the way you would read this is: for every dollar in ad spend, the marketing ecosystem is driving $9.77 in revenue. Super strong.
However, that is only one piece of the puzzle. If you aren’t bringing new customers into the fold, you will run into the “wringing a dry towel” issue. Think of your business like a towel and each time you create a sale you are wringing a little water out of this towel, now each customer is going to have a set LTV (yes you can sort of increase peoples’ LTV’s but it's actually a lot harder than acquirer new customers with higher LTV potential or more LTV left to extract).
So while Blended ROAS is a great metric to understand the effectiveness of your marketing ecosystem, it doesn’t give you any insight into how your new customer acquisition is performing.
NC ROAS enters the chat.
Editor’s Note: Blended ROAS is a great way to pace spend if a client/business is performance constrained not capital constrained. For example, if you ask the CFO or head of finance “how much can I spend next month on the forecasted revenue of $100,000?” They will give you a number (if they can’t tell you that, they are fired 🤣).
Say that number is $20,000. That means you can spend 20% of revenues on ads. So now you know that if your Blended ROAS is below a 5 ($100k/$20k = 5) you are overpacing and need to 1) scale back spend or 2) find more effectiveness in the ads i.e. launch new ads, new angles, better landers, etc.
Vice Versa is you are above a 5, it’s cocaine and champagne time and you can scale your ad spend. Think of Blended ROAS as a sort of marketing equilibrium (sorry for the fancy terms). If you are under a five you are ineffective, if you are over a five you should scale because you are leaving money on the table to acquire customers.
New Customer ROAS is your efficiency metric (see above why we care about effectiveness, efficiency and profits). This is your canary in the coal mine to help you prevent the wringing of a dry towel pitfall. NC ROAS is calculated using New Customer Revenue divided by Total Ad Spend.
Again, we don’t care where the revenue is coming from (attribution agnostic is a fancy way to say this), we just care about how efficient our marketing ecosystem is.
If you look at the screenshot below, it reads the same as Blended ROAS. For every dollar in ad spend, you are driving $3.27 in new customer revenue. Make sure this number is positively correlated (fancy way of saying if Blended ROAS is going up so is NC ROAS) to ensure the long term viability of your business and marketing ecosystem.
Now you can understand how effective and efficient your marketing ecosystem is, but what about profitability? I gotchu fam. We are going to look at profitability through three lenses. The first is Profit on Ad Spend or POAS. This is your Gross Profit divided by Total Ad Spend. We calculate Gross Profit by taking Total Sales - COGS - Shipping & Fulfillment - Payment Gateway Fees.
With POAS, you are able to understand whether you are putting ad spend behind the right products that can drive profitability for the business. Not all products are built for paid acquisition. Some are stellar upsells or cross-sells, but not the main star of the show.
Make sure you are only putting ads behind products that are best sellers (high sales velocity) with a high gross margins. This is berry berry important. You’ll see why in a moment when I breakdown the anatomy of a Shopify transaction, but first let’s round out the POAS discussion.
In the Screenie below, you’ll see that this business, for every dollar in ad spend driving $5.83 in gross profit. Noiceee!
Editor’s Note: In Triple Whale, you have to manually add your Shipping and Fulfillment costs. We are working on 3PL integrations as we speak, but until then use the ol’ copy and pasta in the Cost Settings section. Just click on the cog (wheel looking thing) in the bottom right hand and then add a new fixed expense. I recommend doing this weekly to keep the gross profit and net profit as accurate as possible. Make sure to select the proper date ranges to ensure maximum accuracy.
Up until this point, this has been a review of the 3 ROAS to Rule Them All thesis. So now, if you made it this far you are going to get that new new!
The POAS metric, while an incredible heuristic on gross profits, is not granular enough to give you insight into the unit economics of your business. Hence, the addition of two new metrics and the expansion of the theorem to The New Power Five of Metrics (show title zinnnggg).
The two new metrics were inspired by Ben Yahalom, the President at True Classic, a rocket ship that masquerades as an apparel company.
The new metrics are: Average Contribution Margin Per Order and Average Contribution Margin Per New Customer. The value of these metrics is providing the granularity needed for understanding your unit economics. Unit economics are defined as: “the direct revenues and costs of a particular business measured on a per-unit basis, where a unit can be any quantifiable item that brings value to the business.” Shout out to Paddle for the concise definition.
These two metrics aren’t built out as defaults in the Summary page (yet), but can be easily built using our Custom Metric builder.
Avg. CM per Order = True AOV - Blended CPA - (COGS + Shipping & Handling Costs + Gateways Fees)/Orders) - (Return % * True AOV)
Avg. CM per NC Order = NC AOV - NC CPA - (COGS + Shipping & Handling Costs + Gateways Fees)/New Customer Orders) - (Return % * True AOV)
Editor’s Note: New Customer AOV can be calculated using New Customer Revenue/New Customer Orders
Now that you know the new Power Five Metrics to track, you can easily build them into your Triple Whale Dashboard or whatever you use to track the performance of your business. While these metrics don’t give you the Channel, Campaign, Ad Set or Ad performance (*cough* Triple Pixel *cough*) they will give you the insight into your business to start understanding the effectiveness, efficiency, profitability, and unit economics of your marketing ecosystem.
If you have any questions on setting anything up or why the metrics are calculated, ping me on the bird app or use the chat on our site and one of our incredible CSMs will help you set up these custom metrics for you.
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