Take the “ink blot test for marketers” and learn more about the different factors that determine if an ad is a “winner”.
This content was published in the No Best Practices newsletter on 1.16.2022.
Cody Plofker dropped this question on Twitter at the end of December, and it provoked a lot of interesting discussion. After reading everyones’ responses I have a lot of thoughts–too many for Twitter–so I thought I would sum them up here.
Here is the text of the tweet, in case the image above doesn’t render for you:
Hypothetically, which is the better ad?
A: $58k spent – 1.45 ROAS, $70 CPA – 833 Purchases
B: $25k spent – 2.0 ROAS – $50 CPA – 470 Purchases
(Poll to select A or B)
BTW, Cody is the Director of eCom at Jones Road Beauty and publishes an awesome newsletter from the media buyer/operator POV that you should subscribe to.
This question was described as “an ink blot test for marketers”, and I agree. Based on the responses, there were roughly two schools of thought that I’ll summarize here.
The Media Buyer’s Perspective
This group evaluated the two ads based on topline profitability, probable performance within the Facebook algo and potential to scale.
From this perspective, ad A is the winner. It’s delivering a ROAS above one, so the ad spend is profitable. It delivered 833 purchases with an AOV of roughly $101 each. CPA is lower than AOV so you are breaking even on these purchases from a topline perspective.
Ad B is delivering more profitable conversions than Ad A, but the scale is lower. If both of these ads are running in the same Facebook prospecting campaign, the algorithm clearly favors ad A because it received more delivery. There is no guarantee that Ad B would maintain a ROAS of 2 if the spend was scaled up to $58k.
So if you are answering this question purely within the context of Facebook performance, Ad A is the clear winner. You’re getting more new customers and you’re more than breaking even on your first purchase. What more could you want?
The Operator’s Perspective
This group wanted more information before they were willing to answer the question. They asked about projected LTV of the two customer groups, the unit economics of the business and its financial goals. Because this was a hypothetical Twitter poll, Cody refused to answer those questions, lol.
The reason these questions are relevant? When you look beyond AOV and media costs, it’s unlikely that either of these ads are breaking even. Let’s look at the more profitable Ad B. At a ROAS of 2 and a total spend of $25K, this ad drove $50K in top line sales. The ad drove 474 conversions, so each conversion had an AOV of about $106. Net out your $50 CPA, and you are taking in $56 from each conversion.
But let’s apply some common variable costs to this purchase:
Cost of goods is 25% of AOV ($106 * .25 = $26.50)
Average return rate on purchases is 20% ($106 * .20 = $21.20)
Average cost of fulfillment is 10% ($106 * .10 = $10.60)
That $56 becomes $56 – $26.50 – $21.20 – $10.60 = a loss of $2.30 on each order.
So from an operator’s perspective, this campaign is close to breaking even, but we would want to make it better to make it viable. Perhaps the audience you’re acquiring through this campaign has a lower return rate than average…although that’s rarely the case with customers acquired through Facebook prospecting.
If you’re answering the question through the operator’s lens, both campaigns are driving the business into the red, so neither campaign is “better”.
Side note–a lot of experts agree that if your business can’t break even at a ROAS of 2 or lower, it’s not a fit for Facebook prospecting as a channel. I generally agree, but that doesn’t stop businesses from trying, or agencies from pitching Facebook ads to everyone with a pulse and a Shopify account.
The Integrated Perspective
Running a successful business requires you to make tradeoffs. In this case we’re trading scale (Ad A) for profitability potential (Ad B). There are certain scenarios where you have a high degree of certainty that an upcoming event will drive a lot of repeat purchases.
For example, you might opt to scale acquisition unprofitably in the quarter leading up to Black Friday/Cyber Monday because you know the event is a retention driver. Or maybe this business has a particularly strong 90 day retention rate, so they’re comfortable with taking a small loss on the first order.
Whether you’re a media buyer, an operator, or somewhere in between, you need to be able to speak to the concerns of your audience. And that typically means the ability to view this question from the other side’s perspective.
There are a lot of media buyers on this email list, and I’ve worked with a lot of different agencies over the course of my career. In 95% of cases, an agency will encourage you to spend more as long as they’re able to achieve break-even ROAS. The ultimate P&L-level profitability of each order is seen as someone else’s concern.
And that may be the fault of the marketing team that often provides direction to the agency. Marketers receive media KPIs from finance, but they rarely receive a breakdown of the “why” behind those targets. Without that information, it’s hard to be a true strategic partner as an in-house marketer or an agency.
So, Who Is Right?
Like so many questions in life, it depends on who’s asking.
If you’re interviewing for a role as a media buyer, and your future boss is a career media buyer, the right answer is probably A. Your boss and the organization are both going to prioritize scale. If you’re speaking with a small business owner who is self-funded, the answer is probably B–that person is going to be wary of winding up in a cash crunch.
Either way, it’s worthwhile to speak to both perspectives, no matter the audience. Running a business successfully requires you to take a series of risks. There are moments when it makes sense to scale at break even, and there are moments when it pays to be more conservative.
Something that I’ve found personally frustrating: most marketing teams and the agencies that work for them don’t understand much about finance.
There may be one or two senior marketing leaders who understand concepts like incrementality and contribution margin. But instead of educating the team, they distill marketing performance into a few simple KPIs like Return on Ad Spend or Cost Per Acquisition. Teams and agencies then pursue these KPIs without considering how their actions impact overall profitability.
Blame should be placed squarely on leadership, who is designing incentive systems that ultimately harm the long term viability of the company.
The ultimate goal of marketing is to generate incremental revenue, profitably. You need to understand the unit economics of your business to achieve the “profitably” part of that goal.
For a small or midsize business, the line between profitable and unprofitable is pretty clear. For a large business, or for a brand experiencing a hot streak, it’s much less clear. That’s why big company CMO’s have some of the shortest tenures in the C Suite.
By the way…if you have a different perspective on this question, reply to this email. I would be interested in hearing it.