Paid Advertising Self-Evaluation
Recap + Introduction
In this section, we are going to try to answer a simple but important: Is your website and business ready to begin investing in paid advertising?
We will discuss a brief industry overview of our options and then walk ourselves through a few questions addressing whether or not your company is ready for paid advertising.
Why do we need this done?
As mentioned earlier, I try to prime my customers’ expectations for starting paid advertising. The reason is because paid advertising is not a panacea. It is something that people have to invest in and stick with over an extended period of time. You have to really keep pushing on through good days and bad.
In addition, there is no real guarantee that it is going to work out. You have to just keep pulling at the string and hope until either the knot gives way or you do.
What do you need to know?
A brief industry overview
The digital advertising industry is consolidating to just Google, Facebook, and then there is a long tail of small channels that can be worth your money … or not. Outside of the Big Two, the industry shrank between 2015 and 2016.
The reason for this is because many types of ads do not work as well as they used to. Google and Facebook are consolidating the market because they tend to deliver the best results.
What do most other small businesses do in terms of ads?
Today, many medium sized companies have a presence on either Facebook or Google – paid social or search. One channel tends to work better than the other.
In addition to that, there are a number of different small channels that follow. These minor channels can never support a medium sized company by themselves for whatever reason but when taken in combination with a larger ‘core’ channel, it is a good compliment.
What are the greatest challenges to digital advertisers today?
Google and Facebook’s consolidation of the ad market means continual year over year ad cost inflation. Prices have been going up for inventory every year since I started in 2011.
In the above chart, I plot out the average cost of 1,000 impressions in Facebook’s mobile News Feed ads from 2013 to 2016. While there are seasonal fluctuations from quarter to quarter, the long term trend is up and to the right. I am sure that something similar is happening to Google as well.
Higher costs mean that it takes a little more savvy to start and run productive marketing programs. We have to deal with that because the trend is not changing.
The deliverables and why
Find/Estimate your Average Order Value
Your Average Order Value (“AOV”) is how much each customer spends with you in one transaction sitting. It is a vital part of figuring out how much you can pay for a paid advertising transaction. The higher the AOV is, the more you can afford.
If the Google Analytics pixel is installed on Shopify and you have had some purchases already then you can review this information on Ecommerce Overview page on Google Analytics.
Note that this is the same page as where you find your Ecommerce Conversion Rate. This page is buried a little deep in the interface so note the example screenshot. Under the Reporting tab, go to the Conversions tab and the Ecommerce “sub-tab” under that. Overview will be a selectable menu item under that.
If you do not have this historical data to fall back upon (which is likely if you are just starting out), you can make an estimate by multiplying the average price of your most popular items by roughly 1.5, which represents the number of items your customers are likely to buy in a single order.
What ROAS can you target?
Once you have an idea of how much you can afford to pay, you can work backwards from that.
You should use your own knowledge of how much gross profit you make (meaning how much you have left after subtracting cost of goods sold from revenue). If you are making about a 30% gross profit on each sale then you should target a 1.5x ROAS. (You can calculate something similar by taking the inverse of your COGS percentage, 1 / (1 – 30%) )
Of course this does not cover the entirety of your costs. You also need to account for the money spent to keep the doors open. But that is a little too complex for this notebook.
How great is the potential competition for your audience on paid media?
Some words have more competition than others. If you have to compete in that space you have to get ready to spend a lot of money. Wordstream reports that the most expensive keyword on Google is “insurance” at top CPC of $54.91.
For Ecommerce players, if you are working in a space that is broad it will be difficult for you to find a profitable niche. Facebook’s pricing especially has gotten to a point where it might be difficult to get a sustainable, profitable campaign off the ground at scale. Does not mean it is impossible – the devil is in the details – but the margin of error is awful thin.
I find that if the big name department stores (or travel companies like Priceline) are competing in the space too it could be extremely difficult to get a foothold in the area. They simply have more money and manpower than you.
Some spots that I found really competitive:
- Beauty and cosmetics
- Toys, especially if they are not your own
If you find that this is what you are doing, it does not mean you are screwed and it is time to cry. But you should think hard about that thing that you do that sets your product offering apart from everyone else.
How much can you afford to invest at the start of an advertising campaign? Can you find a better alternative for your advertising dollars?
These two questions are joined at the hip. Paid advertising can take a long time to get started as we iron out the kinks between the targeting, landing pages and ads themselves. In one big advertising campaign on Facebook, we spent over $13,000 before we got our first order. That is not always the case (circumstances may vary) but if it is then you need to be prepared to spend several thousand dollars as we feel our way through the beginning.
With that in mind, you should determine whether or not there are other things outside of the paid advertising channels that better use the money. It depends on the individual benefits of your product and you yourself. If you are good at drumming up attention outside of the digital world, then it might make sense to work on that first before turning to advertising.