Ecommerce Influence Podcast 226: Are You Spending Too Much On Advertising?
by Austin Brawner and Andrew Foxwell
Two Common Questions I Get From Clients Are: How Much Should I Spend On Advertising And What Is A Good Return On Ad Spend?
Andrew and I are tackling these questions today by breaking down the calculations you need to do to determine what a good ROAS is for your business.
We also discuss how to have an open conversation with your advertising agency and the first question you really need to ask yourself before you can realistically estimate the ROAS you need to be successful.
Enjoy!
Episode Highlights
5:15 The inspiration for this episode: one of the most common questions Austin gets in the Coalition.
6:55 What is a good return on ad spend (ROAS)?
9:08 The first question you need to ask yourself to help determine what ROAS is realistic.
11:05 Why you have to know your math before you start telling your advertising partner what ROAS you “need.”
12:15 The first question you should really be asking to figure out a good ROAS for your business.
13:04 Breaking down ROAS calculation and how to discuss it with your agency.
15:49 The importance of making the distinction between warm and cold traffic.
19:27 A further look at how to calculate the ROAS you need for your business.
Transcript
Andrew Foxwell: Yeah, exactly. And I asked Austin, it came out of me saying, what are the number one questions, your top questions that you could ask? And then what are the ones that you commonly see that are mistakes that people are making? And your response was, "I think generally people spend too much money on ads and or they don't understand the numbers."
And so we're going to talk about this from our perspective of doing the numbers and actually establishing gross margin and understanding what ROAS you need. I've certainly heard from a number of advertisers saying, "Hey, I was running ads and actually it turns out it wasn't as good as I thought, and I actually need to turn the ads down or off." I've also heard from media buyers saying, "The client pulled the rug out from under me and it's not my job to do their math." So we want to talk about that and their perspective that way a little bit.
Austin Brawner: And the relationship between the two, because when you have a media buyer, whether they're in-house or somebody who you've hired from an agency or a freelancer, the relationship is different. And as a business owner, you have to come in with an understanding of your numbers and your business, to allow this person to have success. So you can give them the metrics they need to have success.
So again, this episode we're going to dive into it and kick off with a couple of things that I noticed consistently. So let's go into the first question, which is, what is a good return on ad spend?
Andrew Foxwell: Right. So I think the number one thing that is... So there's a couple of things to mention here. I think it's important to establish as an advertiser that for us, a good return on ad spend at this point in time depends on how much you are spending and where you are spending that money.
So I think just generally as a baseline out of the gates, it's important for you to understand that in the United States right now, for accounts that are spending north of $500,000...
Austin Brawner: A month.
Andrew Foxwell: A month, spending $500,000 a month on ad spend or more, and potentially sometimes even more like $300, range, $300,000 a month, a good return on ad spend is going to be something like a 1.5 or a 1.6, that's good. And when people hear that, they're shocked, right? But that's the reality of where we stand.
If you're talking about other countries, and you're talking about smaller accounts, you can obviously bring that number up, that return on ad spend number into a 3X sometimes, I'm sure spending $50,000 a month or a 4X. But it is rare to see an account that's spending, let's say, over $100,000 a month at a minimum, to see that even rounding over a 2X.
So what's interesting about that is whether... we realize it's where your ROAS actually is, it's necessary and it's precipitated on the fact that you understand what the base ROAS is that you need. And as advertisers, we get that number told to us, so we don't necessarily know what that is.
So let's go into the second part of this, which is how does as a buyer, how do I say, here's how you calculate your gross margin and the minimum ROAS you need to be able to scale.
To read and listen more, visit: https://www.ecommerceinfluence.com/what-is-a-good-return-on-ad-spend/
