In most cases, companies take a cursory glance at metrics such as average product margin or even monthly ad spend and then base their goal(s) off of this. Not only is this a fool’s errand, but it could also be a recipe for disaster that leads your company off the edge of a financial cliff.
If all of your advertising programs are measured against these broad metrics, your company could be hemorrhaging money while everyone is giving high fives and pats on the back for a job well done.
So what do you do?
Start by recognizing three key concepts:
- Profitability is a deceptive substitute for gross profit.
- Initial profit is a deceptive substitute for complete customer value (customer lifetime value plus the value of referrals from these customers).
- Only optimize one metric at a time. Increasing revenue while increasing ROI isn’t always possible. Focus on one goal first, then switch objectives once it is met.
Congratulations, now you’re an expert! Just kidding. It would probably help to actually understand what these concepts mean.
Let’s talk about profitability vs. gross profit first. Thinking in the way that many companies do, goals are set based on average product margin. The problem is, not all products have the same margin. Ad campaigns and groups often target only a small portion of your overall catalog, and within that, individual products can often be responsible for a large percentage of sales.
This variation can lead to an incredibly misleading average product margin which causes your low margin products to be treated similarly to your high margin products, even if the sales volume and profitability don’t mirror this.
The best way to fix this is to track the gross profit of every sale, not just the revenue. This way, your results will allow you to optimize the truly profitable segments of your product line and reduce wasted spend on products that under-performing or losing money altogether.
Now let’s move on to complete customer value. Many companies currently focus on gaining initial sales and generating new customers. This isn’t a bad thing, but often times these companies focus solely on the acquisition side and neglect the retention side.
Think about it for a second. Every time a loyal customer makes an additional purchase after their initial sale, there is almost zero cost associated with that sale. You aren’t advertising to them, because they already know your brand. You might send them some promo emails or direct mail coupons, but that’s about it. Your repeat customers are a profit cash cow.
It’s for this reason that your marketing needs to be tailored towards garnering repeat customers just as much as it is attempting to gain new customers. If there are no follow-ups after a sale, no nurturing of first-time customers, they will go elsewhere and your business will lose out.
According to a study done by Adobe, 41% of total online revenue in the US comes from repeat customers. Even more crucial, Bain & Co. studied the habits of repeat customers and found that they spend 40% more on their 5th purchase than they did on the first, and 80% more than the initial sale by their 10th visit!
New acquisition is obviously crucial for growth. However, retaining those customers and turning them into repeat buyers is just as crucial. Aside from simple repeat business, there is also the opportunity for referrals from these customers, which even further their value. Don’t miss out on the opportunity to maximize profits from the customer base you already have.
Lastly, a quick word on goal-setting metrics. It’s always tempting to want to do as much as possible and combine objectives to reach your goals, such as trying to increase ROI while also increasing total revenue, ad spend, and sales volume.
Unfortunately, quite often optimizing for increased ROI will actually result in a decrease in other metrics while you are determining which products are making money and which just aren’t performing. You’ll need to cut away the cancers to your advertising budget, which can in turn decrease overall revenue and sales in the short term.
While this may sound bad, it actually isn’t. You’ll be focusing on the products that perform better, have a higher Return on Ad Spend (ROAS), or a better Value/Cost (V/C). In the long run, you’ll attain more gross profit and be a more efficient company. And isn’t that the real goal of any ecommerce business?
If you’re looking for even more information on goal-setting, download our complimentary white paper on Setting Ecommerce Marketing Goals: Target ROI Considerations for Growing Merchants. You’ll learn the six considerations for improving your goal-setting habits, as well as some conversion rate optimization secrets that can help transform an under-performing website.