The two main metrics that DTC agencies use to track the effectiveness of marketing and ad spend for your Shopify or Amazon ecommerce stores are:
1) CAC (Customer Acquisition Cost)
CAC is the amount you spend on average for every new customer.
2) ROAS (Return On Ad Spend)
ROAS is the revenue generated by an advertising campaign relative to the amount spent on that campaign.
While you should definitely keep an eye on these metrics, there is a whole other side of ROAS and CAC that the agencies fail to mention to you.
Here is what the agencies don’t want you to know about ROAS and CAC and why they shouldn’t be your North Star metrics in ecommerce.
1) ROAS ≠ Profitability
Many ecommerce agencies are still hyper-focused on improving ROAS and showcase it like it’s the most important metric in ecommerce. BUT, what they don’t say is that ROAS doesn’t care about profit. It measures the revenue generated by the advertising campaign relative to the advertising cost, without accounting for other expenses or factors that contribute to profit.
To calculate profit, you would need to consider additional factors such as the cost of goods sold (COGS), overhead expenses, and other operational costs.
As business owners, you only North Star should be profit.
2) You can have a sky-high ROAS but still make very little or even negative money on the bottom line
So, what you should be optimizing for instead is POAS (Profit on ad spend) This helps you make decisions that are better for your bottom line and not the agency’s ego.
3) Your break-even ROAS should include all your variable costs
Otherwise, it’s not accurate and it will leave your bottom-line bleeding. I’ve seen this being forgotten time and time again when agencies help their clients calculate their gross margin.
This is what typically happens:
- The agency will ask you what your product costs are, while they really should be asking for your landed costs per SKU.
- You give your answer
- The agency makes a rough calculation of your gross margin and sets your break-even ROAS from that (and most don't even know their numbers)!
Also, most ecommerce brands don’t even know their LTV per SKU, and hence don’t know what they can actually pay to acquire a customer. This is very problematic, as it can lead to focusing on the wrong type of customer who purchases the least valuable SKUs.
4) You can’t scale your business on existing customers only
There are two main forms of CAC:
- Blended CAC (also known as normal CAC) - these are the costs associated with both acquiring new customers and retaining existing customers.
- nCAC - measures the percentage of the profit of your new customer orders.
If you want to scale your business, you need to be looking at your nCAC and make sure that it is at a healthy level. Because if it’s not, and you’re only acquiring existing customers then firstly you can’t scale and secondly, you might be paying too much for existing customers.
So, be very aware when your agency tells you that they’ve achieved a high number of CAC. Just because the normal blended CAC is at a good level, doesn’t mean you can scale. Be aware of your nCAC - because that is what will allow you to scale
Make sure your agency tells you everything about ROAS and CAC, because if they don’t, they will be leading you down a garden path. Following these metrics alone is not enough to get you to the promised land of scaling up and increased revenue.
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