If the goal of each transaction is to maximize Cash Contribution, understanding the impact of marketing spend to acquire customers is essential.
Let's compare two types of transactions:
The result is that the Cash Contribution is significantly higher in the organic transaction (ie, email list purchase) than the ad-driven sale.
This matters because the Cash Contribution from each transaction stacks up to cover overhead for the business, and ultimately put extra cash in the bank.
A hidden cost of generating profit through increased volume of sales is that it requires additional inventory and fulfillment resources.
In digital marketing, for example, the effectiveness of the dollars spent is measured as ROAS (return on ad spend). If you spent $100 and generated $300 in sales, you would have a 3x ROAS.
Not having a clear strategy around acceptable ROAS can quickly lead to under-recovering your investment in acquiring new customers.
Obviously, it's okay to not break even on an initial purchase if you know the customer lifetime value of that relationship will grow beyond that first transaction. However, the safest thing to do is aim for generating Cash Contribution on the initial sale.
Generally, there's a ramp-up investment period at the beginning of an agency relationship to perform testing and begin building awareness with cold (but qualified) traffic.
Questions to consider when hiring an advertiser:
- What is your monthly fee? What makes it change?
- What do you expect our ROAS to be once we get fully up and running?
- When do you believe we'll hit our target ROAS?
- How much do you believe we'll be able to scale our advertising spend and maintain that ROAS?
Understanding all the costs associated with ramping up ad spend allows for calculating the opportunity breakeven on the investment.