Drive and Convert

Announcer:
You are listening to Drive and Convert, a podcast about helping online brands to build a better e-commerce growth engine with Jon MacDonald and Ryan Garrow.

Jon:
Hey, Ryan, last time we spoke, we tackled conversion rate. Basically, what is a good conversion rate, which it blew my mind that we hadn't covered that topic yet, and in that conversation, we realized we had never discussed what a good ROAS is or return on ad spend, which is really just a couple of fails on our part.

Ryan:
I'm so surprised about that too. Over two years of this and we're like, oh, interesting. We haven't done these really hot topics.

Jon:
But I think that it's a hot topic for sure, and I think it's something that'll be helpful for folks, but I also think that it's pretty telling that we haven't covered that because to us it's just obvious and I think that has been why it never popped up. But I'm sure it's similar to conversion rate expectations in the CRO world that there's just so much baggage around return on ad spend from conferences and previous executive level goals or just some weird source of truth that really isn't true. They're all over the place, it's crazy and these expectations just often defy logic. So I'm really interested to talk to you today about what is a good return on ad spend and if there's the magic number, what you should be aiming for and when you reach it, if you've just hit the big time, you can sit back and relax.

Ryan:
Oh man, wouldn't that be the greatest thing?

Jon:
Just like conversion rate, if we could hit that magic conversion rate that is not 100%.

Ryan:
Yeah, what does it look like, can you sit back and relax? Well, as you probably know and everybody should hopefully understand is that there is no magic ROAS number that you're done. In fact, when it comes to ROAS, there's so many variables involved based on the business and the complexities and margins and all these other things that it would be impossible to say this is the ROAS you should get because it's going to be different for industries and verticals and just like CRO, there's not one conversion rate that makes sense for every brand. There's not going to be a return on ad spend that makes sense for every brand.
But given that, I will actually answer some questions and actually break it down a bit more, but keep that nugget of advice top of mind as you're thinking about ROAS that there's not going to be a one true ROAS that drives your business, but the best ROAS or the good ROAS is going to be one for your business that takes the business to its intended destination and every business goal is going to determine a different ROAS. Even if the businesses are identical, probably going to have different ROAS goals.

Jon:
So similar to conversion rate, it's probably not the answer that people want to hear, but it's the best one and it's what they really do need to be thinking about.

Ryan:
Yeah, if there was one easy answer for it, I probably wouldn't have a job, so nobody would want me to speak. They already knew what the answer was.

Jon:
I love that.

Ryan:
So if we're going to start, we have to make sure that everybody's on the same page from what is ROAS. So hey, to make sure that you understand that, ROAS is an acronym that says it's a return on ad spend, so you take your revenue and divide it by the platform ad spend, but it's also your attributed revenue. You're not taking what the website do.

Jon:
All of it.

Ryan:
And then divide it by how much I spent because there's lots of things contributing to top line revenue. So it's the attributed revenue to the platform divided by spend. And the struggle in a lot of that is we all know in e-commerce, it doesn't operate in a vacuum. There's a lot of mess within it, and so if you have different touch points on one customer, you're going to have likely both platforms taking credit. So I like examples when you're talking in ROAS because it makes the numbers and when we hear numbers or see numbers, we can understand it a little bit better usually. So if we have a shopping campaign or a performance max campaign that spends $5,000 and Google Ads says hey, that drove $20,000 of revenue, you have a four ROAS. 20 divided by five, but if some of those clicks also had a click from Instagram as part of a remarketing campaign, they clicked on a Google ad from shopping and then didn't buy, went to Instagram like, oh yeah, I did have that in my shopping cart, so I need to go back and buy.
They click the Instagram campaign ad. Both of those platforms are likely going to claim the credit for that sale. And so you look in Facebook or Meta like, oh, yep, got a click, there's $100 from that click on the remarketing campaign, we got it. Google Ads is going to say, hey, this person came back and spent $100. We got it. Look at that. Look how awesome we are. In theory, you could add up all of your platform tracking and be like, it looks like I had $2 million of revenue. In fact, I only did 800,000. What happened here? So you have to understand that there's a lot of complexity to true ROAS but also understanding where a platform sits on the attribution funnel and what the goal of that platform is or that specific campaign. It's like a bowl of spaghetti and trying to untangle all of that as you're eating it. So it's not easy, but we have to at least take some steps.

Jon:
So it's pretty clear then that having a single source of truth is probably farfetched, nothing's going to add up no matter what platform you use. Is that accurate?

Ryan:
Yeah, exactly. You're going to need to get some source of truth though as a starting point. You can't just go in and be like, hey, I'll never know. Therefore, we can't do anything. That just gives you no leverage. You're going to be pushing and pulling. You're throwing your hands up saying, yeah, whatever, and that's going to probably not get your business to where you want to go. Most often it won't.

Jon:
Okay, fair enough.

Ryan:
You might get lucky, but it's not intentional.

Jon:
As I'm understanding this then, probably the number one thing we need to do is understand what numbers to trust because in the instance you gave, if Instagram and Google Ads are both going to say 100% which isn't true, where do we start? How do we get real numbers then?

Ryan:
Most businesses should at least have analytics from Google on there. It's free, and I'm not going to tell you that it's perfect and it should be the one source that everybody believes is actually true, but you got to have it there because it's free and it's a good source that everybody has. Everybody working on your site or in your marketing is going to likely understand analytics and can actually paint the correct picture using some of that data. We did have a recent move to GA4, which changed the attribution and tracking game quite a bit. We lost third party data and cookies.
So as of right now, the vast majority of e-commerce businesses out there are going to likely need something in addition to Google Analytics, something like a Northbeam or a Triple Whale, especially if you're using social as one of your traffic drivers just because social is the one that gets that struggles with attribution because of impressions and because of different types of, it's just it's complicated. And so I really like those platforms helping paint that picture. Another one that's good is nopCommerce, by the way. Post-purchase surveys are really good. It's weird that we get more advanced in tracking and then we're going back to a survey that's like, where did you hear about us?

Jon:
Well, let's be honest, the best way you're ever going to get accurate data is to just ask somebody, because I often of the mind especially, we see this a lot in optimization, but I'm of the mind that it doesn't matter what the data says, it's what the consumer recalls. What was that they recall led them to your site to purchase? Even if it wasn't what they actually clicked on, we do want to know what they remember because that's probably where you should be investing your dollars, not so much on what they actually clicked on, although that is helpful, don't get me wrong. But if I could have something that left a lasting impression with a buyer versus something that didn't, I want the lasting impression.

Ryan:
Well, and generally we already know the clicks. That's the easy part is saying, hey, you clicked this. The difficult part and the problem we've always struggled with is what's the value of an impression on a social platform that you saw it. Maybe. It depends on where it was on the page, the impression pixel fired, did you actually see and pay attention to that? Especially if you're on TikTok, that's where the post-purchase surveys tend to be the most valuable. A lot of people find out about new brands on TikTok. Very few of those people ever click on a TikTok ad and go and take action. And so we found one of our beauty brands has a large influencer presence with their founder, and she invested a lot in TikTok early on and had a pretty decent following, started running TikTok ads and in analytics it was like, you are lighting $5,000 a month on fire. This is not great. Went and used nopCommerce and some post-purchase survey stuff. Found out, holy smokes, that $5,000 is driving a tremendous amount of sales.
They're hitting performance max campaigns on social where we can't see all the queries, but without TikTok, those never happen, and it wasn't a quick conversion, which was surprising to us. We've done a lot in the beauty space and we've seen a lot of data that there's some consideration, but generally the window of purchase is pretty condensed. It's not like you have to wait 30 days for the average person to buy some mascara or blush or eyeshadow. TikTok though, it can be 30 days. You see it initially on TikTok and you might not take action for 20, 25 days. It's been important for us to have that to be able to attribute a ROAS of some sort to TikTok through third party tools because Google Analytics is not tracking any revenue from clicks or very minimal on TikTok clicks.

Jon:
Yeah, that's great. So obviously attribution then can really complicate the ROAS but based on my conversation with business owners, I bet business goals throw a wrench into that mix. Okay, so my ROAS is I'm getting $2 of revenue for every dollar I spend. That's a great return on ad spend, but I see these goals all over the place and it clearly just messes with what should be there, right?

Ryan:
So marketing's easy online until you get a business owner involved usually. As a business owner, I mess it up all the time. I get it because if you're a business owner trying to sell your business in the next year, you might have very different goals for your marketing spend than somebody that, hey, I'm not going to pass this business onto a kid or even think about exit for 10 years because I'm in it. I like it, I'm not leaving it. And so your strategies and what you're spending money on is going to be vastly different in those two scenarios.
It could be identical businesses, but in one where you're going to sell, you might pull back on some lower ROAS marketing because you want to make sure the bottom line looks larger to get more of an exit number. You want to not sacrifice top line, but you might maintain top line but grow bottom line by saying these were good for filling an email database if I was going longterm, but right now I'm not going to be the longterm, so I don't care. I need short-term and I need to look good on a P&L.

Jon:
Does this also go for awareness for instance? If you're just trying to generate awareness, then your ROAS might be less.

Ryan:
Exactly. So if you're, for example, last week I talked to a company, starter shoe company that I told him it felt like it's a training shoe for runners, and you probably remember these shoes, you played basketball in the nineties where they had the big giant thing on the front of the foot to make you jump higher.

Jon:
Oh yeah.

Ryan:
And so all of us, I was like, I legit now I'm much shorter than you, like a foot shorter than Jon. And I was like, Spud Webb must've worn these shoes to dunk, so I'm going to get these shoes and I'm going to be able to dunk at 5'6. Isn't that great? Not even close.

Jon:
And meanwhile, running a lap on the track in those to improve your vertical was just so painful.

Ryan:
It destroyed.

Jon:
I'm sure has led to 1,000 Achilles problems that people our age.

Ryan:
Oh man. So this guy has created this shoe that helps distance runners train by helping them land with these shoes more on their forefront than their heel. So you normally, you run heel first, go on your toe. This helps you land in the forefront to train different muscles to increase endurance while you're running. So he's like, "You're not going to run a half marathon in these, but you're going to at least walk in them for a few laps or you're going to train a two, three mile run to help increase different muscles for your legs." I was like, "Oh, cool." But they're premium price point and he had been spending $10,000 a month at a 1X trying to get his brand off the ground on a lot of Google and some social, and he is like, "I need to get to a 3X." I was like, "Well, why?" He's like, "Well, because I need to make enough money to stay in business." I was like, "That's a good goal. I like that staying in business goal."
I said, "But your shoe is priced like they call them super shoes right now because they actually return more energy than they put down." And I was actually researching those before I talked to him. I'm like, "This is great," but that's the price point he's competing at, but his shoe is not that and there's a lot of education. And so I said, "There's not a scenario in which you are going to market at a 3X and keep your business afloat because you can probably get to a 3X, but you might spend $50 and get one sale and that's not going to keep you in business. You're not going to turn inventory over." I said, "So if you are going to spend at a return that makes sense, you're going to have to pivot and probably do some things within the social media influencer space where you're paying an influencer and doing dark posting rather than these things." I told him, "You don't pay an agency to do this." He was paying an agency.
And I was like, "I wouldn't even tell you to come work with us because we're not going to help your return be higher because there's just not search that's going to justify that at the bottom of the funnel." And so business goals have a massive impact on what does make sense or doesn't make sense and where you're going to be advertising. If there's no existing search volume for your product, like hey, a training shoe that helps you land on your forefront. People don't search for that. And so you can't say, oh, we're going to spend $5,000 at the bottom of the funnel and get a 3X and it's going to be great. Stay in business. You have to educate and cause people at the top of the funnel to keep searching for that and come out through the bottom.
I told him, I was like, "If you had actually created a super shoe to compete with Nike and Aasics and Adidas at this point, you'd probably be getting a higher ROAS than a one just by competing with the exact same type of product with a different logo on it. But because you're not, and you're not a normal running shoe, but a training shoe that nobody searches for, you've got to create that and that takes a different part of the funnel and different ROAS." So vastly difficult to create an industry vertical ROAS or business cycle ROAS.

Jon:
So what was your recommendation to them?

Ryan:
So my recommendation was pull all of your spend back, hold that money from Google and Facebook at this point, you need to go manually spend the next two, three weeks finding some influencers in the distance running space that have a following that's interacting with them well. Send them some shoes, get the permission to dark post, and you're going to run ads as that influencer to drive their followers to try your product because they did and they raved about it. And then I also told him you should probably go find some college athletes in the NIL space now that that's legal and find [inaudible 00:15:34] track athletes. He wants to break into high school football, soccer, basketball athletes. As part of their training regimen they need to be walking or doing some of their work in these shoes. And I was like, you could easily create an affiliate system. He was whining about having to give product away constantly without any guarantee of return.
I was like, yeah, I get that, but most manufacturers have at least 50% margin and he's about that space. So I was like, "Hey, you can give your product at half price to them and then give them commission or an affiliate link for all of their followers or friends and family that want to buy these as well, that they can get paid on all of those." And then you say, "Hey, if you get to a certain threshold, you would then increase your velocity of free product to them." Like, okay, I'll give you this one and half off once you get to, and again, I'm just making numbers up, but once you get to 5,000 in sales, you get a product per quarter for free or for six months, and once you get to 10,000, then you get this, then maybe you get a higher commission, but you make it gamify almost with a college athlete to get more money and increase their following.

Jon:
Sounds like great advice to me.

Announcer:
You're listening to Drive and Convert, a podcast focused on e-commerce growth. Your hosts are Jon MacDonald, founder of The Good, a conversion rate optimization agency that works with e-commerce brands to help convert more of their visitors into buyers and Ryan Garrow of Logical Position, the digital marketing agency offering pay-per-click management, search engine optimization and website design services to brands of all sizes. If you find this podcast helpful, please help us out by leaving a review on Apple Podcasts and sharing it with a friend or colleague. Thank you.

Jon:
Okay, so I'm hearing a lot of variables here. There's just so much to think about with this, which going into this, I assumed you'd just be like, there's no magic ROAS, we're good. End of recording. There's definitely a lot more here. So how do you know if your ROAS is? I'm just stuck on, okay, I can't trust a single channel. GA4's data is okay, I could pay for Northbeam, Triple Whale, and even then they're probably not going to be 100% accurate. That's okay, but it's going to at least combine everything in one place. I'm hearing maybe don't even worry about ROAS. Focus on other things. So where do we go from here? How do I know my ROAS is good? What do you recommend I do?

Ryan:
I get it. E-comm managers, marketing managers, you want to know whether you're doing well and you need a number you can take to bosses or executive teams to say, "Hey, I'm doing good. See, look at this number." And ROAS is a pretty good indicator of what's going on. Are you spending money and making money? Great. ROAS is that number. And you can't really though pit yourself against the competition just like you can't in CRO because you don't know if you can trust the number that you've heard on stage. You don't know where they're at in the business cycle. You don't know what their customer acquisition velocity is. You don't know what their market share is. You don't know what they're doing with email, so you can't really use that number in a competitive space. But what you can do is create a number that makes sense for the brand. And so it does require some internal conversations.
So a marketing manager just deciding what a ROAS goal is good is probably not a good idea in a business. The marketing team needs to get with ownership or execs and say, okay, what do we need to do from a business standpoint? What's the goal of the business? Where are we taking it? And then let's build the appropriate ROAS goal for different types of traffic to help us accomplish that goal. Because you can't have the same or you shouldn't. I said you can't. You can do whatever you want, but you shouldn't have the same ROAS goal on Meta platforms or social media as you do on Google Ads. And even in Google Ads, you should probably have different ways of looking at ROAS internally. Like brand text ads are probably going to have a higher ROAS than non-brand text ads. You can see the search queries on. Different types of performance max campaigns may have different target ROAS goals, and that's okay depending on the types of sales and products that are driving based on the lifetime value of those.
So if you're trying to come up with one ROAS goal that makes sense, I think you're asking the wrong question and you need to get a little more complex than that and have more conversations so you can have multiple return on ad spend goals. I think that would be step one. Understand that you as a brand are going to have unique ROAS goals and you can't worry about what your competitors are doing as far as ROAS because if you heard what their ROAS is, how do you know that's true? And if you're a manufacturer that's competing with retailers, you would assume that the manufacturer's ROAS is going to be different than a retailer selling the same exact products because they have different margin. And the goal of the manufacturer may be different than the goal of the retailer. They both want to sell, but where are they selling? What's their target market? The manufacturer trying to be more aggressive to open up new markets that the retailers can then play into.
You might accept a lower return on ad spend to break into a new market than you would on an established market that you're already leading that category. With so many variables, understanding your customer and the lifetime value of your customer or new customers is going to probably dictate what your ROAS goals are.

Jon:
So going back to lifetime value almost matters more than anything else. And I've been hearing this over the years we've recorded together that lifetime value is something that people don't put enough emphasis on, and if you really want to build a sustainable business, that's a metric that you really should be focusing on.

Ryan:
And I always, not always, but the vast majority of my conversations are talking about online marketing and driving traffic, thus our Drive and Convert. But I'll tell most marketing teams and business owners, if you don't have a lifetime value in your business, you probably shouldn't be focused on acquiring traffic and customers yet. You at least have to have, even if you're just starting out, you have to have an idea of what your lifetime value is going to be and how you're going to bring that about.
If all you're going to do is go get new traffic and you're not going to ever email or think about how they're going to come back into your brand, I'm going to say you're probably a brand that's not going to be around that long. Because again, I've said this many times, but Google's done a phenomenal job of moving that first order profit from your bank account to theirs, and you can continue to fight and get angry and get mad at Google for having the cost go up, but at the end of the day, it's their platform and their world and we just get to play in it.

Jon:
Oh, and look at it this way. The fact that you can use that platform, give them the profit on the first sale, to have someone in your database and now own that first party data and continue to sell to that person at a much higher margin is great. You're paying for that privilege, and if you just have that awareness and accept it like you're saying, then you're going to stay a lot more sane, let's put it that way.

Ryan:
Yeah. I still talk to people to this day that don't have Google Analytics on their site because they don't want Google to have their data. I was like, well, you're spending money on Google Ads.

Jon:
And I hate to break it to you. Google already knows.

Ryan:
Google owns it and they already know it. So your hiding is just limiting your ability to grow and scale your business and compete. And if that's your goal, great. You're doing a wonderful job at it. But if your goal is to actually grow and scale the business, you're going to need to be willing to let other companies see some of your data to help you visualize it.

Jon:
If you don't want to drive traffic or convert it, then here's your formula.

Ryan:
Perfect. You're doing awesome. It's not as simple as your summary last episode about conversion rate, the best conversion rate is one that's always improving. ROAS is probably not always going to improve. So the best ROAS is one that you can say, this is helping my business get to here. If your ROAS goal is the same now as it was three, four years ago, it's wrong, almost guaranteed. And it needs to be adjusting to the market and to the platform that you're spending on. And it needs to at its core make sense for what happens after the customer comes into the brand. And so you many times need to look at existing customers, make sure you're uploading that list of emails to the platform, whether that's Meta or Google or Microsoft to build the audience off of. And then new customers, what are you using on that platform to drive new customers into your file? Because GA4 and soon to come iOS17 is really making first party data the gold that we have in e-commerce right now.
If you are not acquiring new customers and getting that first party data, you are falling behind your competitors. And even now, it would be very difficult to start a brand using just Google traffic because you don't have that first party data to play with. And everybody else that does is so far ahead of you if they're smart, and if you're an existing brand that's aggressive on Google, you need to push on the gas now because the further ahead you are now with first party data, the more difficult it's going to be to ever catch you. And that to my core, that hurts because I'm an entrepreneur and I love the business idea. I love the new business coming out and really sticking it to the existing ones, but privacy and first party data is making that very difficult to do.

Jon:
Yeah. It's going to be interesting over the next year plus as all this stuff becomes standard basically, and everything else phases out, it's going to be a challenge. Google is upfront about it. They've said as much. First party data is going to be where it's at, and they're giving you the tools to help provide that to them so that they can do a better job, but you got to collect that first party data.

Ryan:
Well, and funny enough, this is not a charge that's being led by Google. It's being forced on Google.

Jon:
Oh, of course.

Ryan:
The EU, California, Apple, they are the ones forcing a lot of this privacy type. And I don't think it's bad, by the way, you can't hear that. It's just a different world where you need to have your traffic, your customers, your data. You can't use really cool creepy audiences from Meta and Google that were from a marketing standpoint, awesome, but kind of creepy.

Jon:
Yeah. Well, here's the reality. You just need to accept it and buy into what the current situation is and move forward. And part of that is understanding what's a good ROAS for you and really trying to focus on where you're going to get your data from. I think that's a big concern.

Ryan:
As a general statement, to complete the entire bow on it, most brands out there, most e-commerce sites need to be comfortable with breakeven customer acquisition ROAS. So if you have a 50% margin on your products on average, you need to be comfortable spending that to 2X return on ad spend for new customers, whether that's a Meta platform or a Google or Microsoft. The other side of that equation is retaining your existing customer. So as they search for your brand on Google, that group is going to be profitable. You're going to get a good ROAS on it, but you can't really set a goal ROAS on brand searches on Google because so much of that is outside of the control of what you're bidding or what your ROAS goal is because it's going to be impacted by competitors or retailers bidding on that term.
It's going to be impacted by Google testing search results pages. Sometimes they'll emphasize shopping campaigns or P max, and sometimes they'll emphasize text ads. Too much is out of your control to say, hey, if it's not a 50X, I'm angry. It's like, no. This month it might be 50, next month it might be 20. It's profitable, but you just can't necessarily dictate what level it's at. The other side of-

Jon:
And how much traffic you're going to have coming for those brand terms.

Ryan:
If it's a brand plus term and you have a small organic listing that's not taking up as much page versus a large organic listing. Paid search may have a different impact on that. Just know that your click share by having shopping and text ads and organic is going to be much higher with all of them, and so it's going to be profitable. So I don't really necessarily worry about it, but I put it off to the side and say, okay, great. If I break even on everything else in my Google Ads account, for example, and still have my brand campaigns as profitable, overall the account's going to be profitable so I don't have to worry about profit in the ads. And my wife gets nervous when I tell her in our brands, I'll spend $100,000 next week on acquiring new customers for that brand because I have a lifetime value in place for those, but I have to get $100,000 in profit on that ad set, so it's a wash.
But I'm paying for the Google ads after I've already collected the revenue from my merchant processor. And so I know that as long as I can fulfill the orders, I'm not floating the cash really, it's just going to be paid next month when I pay off the credit card, and you're getting hopefully a rebate on that cash that's a tax free to the business owner. So there is some value there from running ads if you're doing it right, make sure you have a cash back card on there and don't do just a random reward. Do cash. Cash is better. So multiple ROAS goals based on lifetime value and reinvestigate it. I think quarterly would be a reasonable timeframe to be looking back at are my ROAS goals making sense and driving the business in the direction I expected it to when I set that goal? If they're coming back in three months to buy something else, great.
Maybe we can factor some of that lifetime value into the original ROAS and maybe I shoot for a 1.5X on new customers, even though my breakeven is two, because I know that my email and loyalty programs bring them back in 2, 3, 4, 5 months at a much more profitable level than Google was.

Jon:
Right. The reality is that you're going to have to invest to get going, and you have to have some funds to really get going in DTC, I don't know how to better put that. I don't think you can possibly expect to just be breaking even or making a profit right off the bat. It's just not going to happen.

Ryan:
No. [inaudible 00:29:33] There are some brands that, in fact, last week I talked to a brand, I told him I was very surprised. It was the gentleman that owned the business. I said I was surprised that I'd get to come to him and say I don't think you're a break even ROAS in your industry yet. His industry is behind as far as competitive advertisers. He was shooting for, I think a 12X. He'd been doing it since 2015. I was like, well, that's great with your 35% margins, but maybe you could make overall more profit by shooting for a six or a 7X. You might quadruple your revenue by lowering your ROAS goal, which gives you overall more profit, so you might need as a business owner, instead of thinking about a ROAS goal because it's nice and that's what you've always gotten is thinking about, what if I just maximized profit with that elasticity on a supply demand curve? There's no ego in your ROAS. Big deal. But if there is ego and profit at the bottom line, just scale.

Jon:
Yeah. Look, you'd rather have a smaller piece of a bigger pie. That's the reality. So awesome, Ryan. Well, this has been enlightening and I'm glad we got to cover these two topics, CRO last week and ROAS this week. I think it's helpful, and while it makes so much sense to you and I, I think just explaining it for everybody makes a lot of sense. So yeah, thanks for-

Ryan:
Glad I could help.

Jon:
Thanks for bringing the topic and chatting.

Ryan:
Thanks, Jon.

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Thanks for listening to Drive and Convert with Jon MacDonald and Ryan Garrow. To keep up-to-date with new episodes, you can subscribe at driveandconvert.com.