Hello friends. It’s Michael Nguyen from Click Metrics and for the last few years now, we’ve been honing our ecommerce advertising skills for our customer’s websites.
10x return on your ad spend seems to be the holy grail target for nearly all ecommerce owners that we’ve worked with. So what does that mean in practice?
It means if they spend £1,000, they would ideally want back £10,000 in website sales that came DIRECTLY from Google Ads, hence 10x return.
This means you’re willing to “give away” 10% of revenue to achieve £10,000 revenue.
The bottom line is, when you spend money on advertising, you’re effectively eroding some margins away, but that’s ok. As long as it’s still profitable within reason.
In our experience, Google Ads scaling and getting a decent ish ROI gets very difficult when your margins are less than 35%. We’ve managed to do it with a company with only 20% margin but you need some luck on your side.
If your average product margins are only 20%, then you absolutely must get 10x return on your ad spend because it will cost you 10% to make 10%.
It goes like this:
Product Sale Price: £10
Margin: £2 (20%)
Ad spend £1 to get a product sale of £10
Minus £1 from the margin (which you get back)
You’re left with £1 profit
Bear in mind the above examples do not take into account taxes, shipping etc but the principles are the same. You run the business on what margin is left.
For a 35% margin business, you might be able to give away 20% to still retain 15% to run the business. So the min ROAS (Return on ad spend) required is 5x
Eg Ad Spend £1,000
Revenue required £5,000
35% margin = £1,750
Minus ad spend = £750
So you get back your ad spend of £1,000 and now you have a “new” £750 profit
The challenge with ecommerce is to know what YOUR ecommerce business numbers are. We can do benchmarks all day long but until you run the data on your own website, you won’t know what your numbers will be. Generally speaking, we would give guidance that you “should” be able to give away 20% margins.
With that said, you might want to get products where you can add 40% margins to leave enough room for Google Ads to wiggle. It can be done with 20% margins, you’ll just need to squeeze the campaign harder.
Tbh, you can decide whatever margins you want to use, the results will be dictated by the market, your website, your pricing, website. Let’s not be so way out that you break your marketing variables.
So how does an ecommerce company actually achieve 10x on ad spends? For a website to achieve an overall 10x on ad spends, it means parts of your website / products / category actually produces more than 10x.
All website ecommerce sales fall into the 80 / 20 rule (Paretos principles). Which means, 20% of your products will produce 80% of the revenue. And it’s likely those 20% products produce more than 10x. Maybe even 15x. The remaining 80% of products that produce 20% of the revenue, might only produce 6x in ROAS. When combined together, the site may average at 10x ROAS.
80/20 is just a concept, as your data may fall into 70/30 or even 60/40 but the idea is the same. The skilled business owner would want to look for those pockets of products and laser focus on those and sell the hell out of them until the numbers go backwards, then we take stock.
The way Google distributes shopping clicks is also in a 80 / 20 fashion, so when you know how to read the numbers, it just becomes an exercise of deciding where traffic goes.
Below is a shopping campaign and that particular category returns 8.32x. See the click distribution from the second line. It’s top heavy and gets less and less as you go down the list. The 80 / 20 rule is apparent on click volume, category level, product level.
From here you read the data and make your marketing decision on where clicks should go. Can we break down that 8.32x ROAS category and see which product is dragging the campaign down? Maybe there’s a product in there that gets many clicks with low ROAS. If we remove it, perhaps the category can improve because there are small products in there, that are producing north of 10x to help settle the category at 8.32x.
Before you can do any of the above to get 10x returns, you’ll need accurate tracking with your Google Ads and Google Analytics.
“What you can’t measure, you can’t improve”
At Click Metrics, we’re obsessed with tracking. Until tracking is correct, we will test a small campaign to see how that data falls. Tracking and measuring is EVERYTHING. Get that wrong and you’ll be making decisions with poor data. Correct data = better decisions and results.
We use Google Analytics as the third party tool to verify sales at a macro level and then segment the Google Ads sales. Once those numbers are consistent with the data in Google Ads dashboard, we’re ready to go.
Fixing Google Ads tracking involves the following:
Google Tag Manager
Conversion Tracking from forms
Conversion Tracking from numbers
Conversion Tracking with event clicks
In most cases, you’ll need a specialist to implement the above because it involves working with code, creating tag containers and more code language. If you’re a beginner and want speed, get a specialist to fix this for you.
So until tracking is accurate, you’ll never be able to scale properly and safely. I used to think that scaling campaigns is just about increasing ad budget. Yes that is true, you still need to do that but. You want to turn on the taps but make sure it goes down the right path that grows instead of leaking down other paths which drag down overall performance.
At Click Metrics, we create Google Ads video audits. We look at all the important areas of your account with regards to your specific numbers. We can pin point, where the wastage in ad spend right away. We’ll diagnose whether your tracking is lacking and how to fix. The 15 minute video audit is free. If you’re interested in the video, make a request on this page.
The bottom line is, to get scale in your advertising campaigns, you need accurate tracking, and the ability to read the revenue figures in the category, understand how 80/20 distribution works and what to do with it next.
We figured out that Ecommerce advertising is best done using a scientific approach. The numbers and data tells us what we need to do but only if we understand what our rules are, thresholds, and next steps are. At Click Metrics, we have this figured out. Get in touch if you have any questions.
- 10x Your Ecommerce Revenue with Google Ads - November 3, 2022
- How To Start Tracking Sales & Conversion With Google Ads - June 14, 2018
- Using Google Ads is like Shooting Fish in a Barrel - June 13, 2018