At least once a week I see someone on Twitter asking for “industry benchmarks” for Facebook advertising ROAS. In case you’re not familiar, these folks want to know about advertising performance for brands that sell similar products.
That question inspired this post, because you should NEVER use another brand’s KPIs to set your own.
I understand why this misconception is so popular. Every advertising agency I’ve worked with compared our brand’s results against industry KPIs. And brands themselves are obviously hungry for this info.
The temptation to compare ourselves with others is hard to overcome.
Using industry benchmarks is just one common misstep brands make when developing their own KPIs for managing marketing investment.
But an error here can have a major negative impact on your bottom line.
So I’m going to review some best and worst practices for developing advertising KPIs, then show you how to do it with a simple example.
Here are some common practices for setting advertising KPIs that will often lead you down the path to unprofitable marketing investment.
Let’s say you are boostrapped women’s skincare brand. What does it really tell you that other women’s skincare brands in your price range have an average Facebook ROAS of three?
Your competitors may be funded by venture capitalists–foregoing near-term profitability to maximize growth. If you did the same thing, you’d be out of business. Your competitors could be really bad business operators, coasting off brand heat while ignoring the fundamentals. If you made the same moves, you’d quickly run out of cash.
I could go on and on with these scenarios. An important rule of thumb in marketing and eCommerce: just because you see it, doesn’t mean it’s working. If you want your marketing spend to drive profitable growth, you need to run your own race.
An advertising campaign that achieves an ROI of one (i.e. you spend $100 on ads and get back $100 in orders) is not a “break even” campaign. Yes, you earned back the cost of marketing. But you’re still on the hook for the cost of producing the product, selling it to the customer and fulfilling the order. Your marketing KPIs need to take all of these costs into account, especially if you don’t have access to outside funding.
This is the top source of conflict between marketing and finance. Businesses with different funding models have different risk profiles and appetites for growth. A venture-backed brand is going to be more aggressive than a bootstrapped brand.
A VC firm expects that many of its investments will fail, so they’re willing to make high risk, high reward decisions. The founder of a bootstrapped company is often counting on their brand for a paycheck and long-term financial security, so that person is going to be more conservative.
There are even different levels of risk tolerance within a single funding model. A brand with high margins and a negative cash conversion cycle will be willing to spend more on ads than a brand with slim margins and less negotiating power with suppliers.
Using customer lifetime value (LTV) to set targets for acquisition cost is sometimes necessary, but always risky. You’re making a bet that historical behavior will continue on in the future. The longer the time horizon you use to calculate LTV, the riskier the bet.
Your advertising performance targets should be a negotiation between marketing and finance. Note that I said a negotiation, not a demand. When “the business” demands a specific amount of growth at a specific return on investment, marketing is usually being set up to fail.
Most businesses are trying to grow profitably. Some VC-backed brands are trying to grow at any cost, but we’ll ignore those cases here because that strategy hasn’t really worked out for consumer brands. In order to run a profitable growth marketing program, a few things need to be true:
When you develop KPIs for your marketing spend they should act as guardrails that ensure the three conditions above are being met. You’ll need guardrails for your total digital marketing budget as well as performance in specific channels.
The specifics will vary for each business, because every business has its own unique financial makeup. These are a few points to consider for each condition:
There’s an old advertising cliche: “I know that I’m wasting half of my advertising budget. The problem is, I don’t know which half.” Cliches are true for a reason: marketing attribution is hard, and you’ll never achieve the perfect, waste-free marketing mix. But that doesn’t mean you shouldn’t try.
The gold standard for understanding incremental revenue is holdout testing: half of your audience is exposed to your campaign, the other half is not, and you compare performance between the two. But it isn’t realistic to test all of your marketing this way.
If you’re a young DTC brand, paid digital acquisition is usually going to be your primary source of customer awareness. If a campaign is excluding existing customers and site browsers, the sales it generates will be almost completely incremental.
You can get a sense for the incrementality of other paid campaigns with pre-post analysis. Turn on one campaign at a time and measure the impact on total sales. Try to do this during a relatively stable period to reduce noise in your analysis. Note: this is one of the only scenarios where I’ll advocate for pre-post analysis. Otherwise, avoid it!
If you are a brand doing less than $25M in annual revenue, your next dollar will almost always go further acquiring a new customer instead of retaining an existing customer. Your mental model should be “How can I scale acquisition profitably?” not “How can I maximize my return on ad spend?”
If you’re a brand with a large retail footprint, sizeable wholesale distribution, or significant spend in channels like TV or OOH, incrementality gets more complicated. A mix of attribution software and holdout testing is the way to go here.
One thing that all brands, regardless of size, should watch out for is high-cost software or services that target shoppers close to the bottom of the funnel.
These services will always appear to have amazing last-click results…because they target shoppers with high purchase intent.
But the incremental revenue generated rarely outweighs the costs. Always run a pilot and holdout test if you’re considering these options.
To keep a handle on profitability you should be tracking three metrics on a weekly (or daily, if possible!) basis: average cost to acquire a new customer, new customer average order value and average contribution margin dollars per order.
Your CAC should be lower than your AOV, and ideally it should be lower than your average contribution margin dollars per order. I typically calculate CAC by dividing all marketing spend during the period by the number of customers acquired.
These are directional metrics that will tell you if you’re profitable or if you have a problem. They should not be used to manage individual campaigns.
Setting individual campaign KPIs gets tricker the more pure acquisition channels you have running.
If Facebook ads are your primary acquisition channel, you can manage day-to-day performance by setting a ROAS target that corresponds to your target contribution margin per order.
For example: if you make $25 of contribution margin on every $100 of revenue, you don’t want your Facebook campaigns to have a blended ROAS lower than 4.
Yes, I am using ROAS, even though I hate it. And that’s because you are not supposed to be managing your campaigns to a ROAS target, but simply using it as an indicator that performance may be sliding into the “unprofitable zone”.
The CAC, AOV and contribution margin metrics for total sales will give you the entire story.
If you’re cash-flow constrained, you can use MER as a daily guardrail to prevent excessive marketing spend. You may forego some potential growth by going this route, but it’s less risky from a cash flow perspective.
Simply take the ad spend: sales ratio from the annual or monthly P&L forecast and apply it to your daily spend. If performance marketing is budgeted at 30% of this month’s sales, don’t spend in excess of 30% of the day’s revenue.
Narwhal’s Naturals is a (completely made up!) supplement brand with a single product: whale oil supplements that increase your brain power to make you a better media buyer. These statements have not been evaluated by the FDA.
So how would you set advertising KPIs for Narwhal’s Naturals? The first step is to review the current state of the P&L and marketing performance and decide if you like what you see. If you’re just starting out, you can use a business plan instead.
Here are some (made up) facts about the business:
This means that Narwhal’s Naturals is not profitable on its first order at a contribution-margin level. But they are profitable within 30 days–not bad.
Now for some (made up) facts about Narwhal’s advertising strategy:
This means that some prospects are engaging with both affiliate and Facebook ads before converting, because the ratio of AOV:CAC is lower than the last-click ROAS in individual channels.
There are sales coming in from returning customers at zero marketing cost, because the media efficiency ratio is lower than the ratio of AOV:CAC.
If you’re happy with the way this business is running you can continue to manage Facebook and affiliate to their current ROAS goals. But you should monitor trends in CAC, new customer counts and overall sales performance while doing so.
If you’re unhappy with your business results–perhaps you want to reduce CAC so you are contribution margin profitable on your first purchase–you should start with channel strategy, not a ROAS target.
You know that customers are interacting with multiple paid channels before they purchase. You can either adjust your channel strategy in an attempt to cut down on this, or you can try to increase first purchase AOV. Or do both!
Successful media management is really audience management and financial management. Metrics like ROAS, CAC and MER are an outcome of your strategic decisions. They also serve as guardrails to prevent you from making huge investments in ineffective campaigns or from running out of cash.
The answer to your business problems isn’t always going to be “increase ROAS” or “reduce CAC”. There are a lot of moving parts beneath those numbers, and pursuing optimization just for the sake of it can have unintended consequences.
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