If these three things are true about your brand, you should not run Facebook ads. You’ll never be able to break even on your ad spend.
This content was first published in the No Best Practices newsletter on 09.11.2022.
I sent out this tweet a few weeks ago and got a fair amount of pushback. Some of it was thoughtful, and some of it was…less thoughtful. I wanted to unpack this tweet a bit to help you avoid walking into “no win” situations as a marketer, agency or business owner.
The hype around Facebook ads is real, and it is loud. This leads many to assume that Facebook Ads are a plug and play solution to more systemic business issues, which is not the case.
Before we go any further, I guess I need to issue a warning: No Best Practices is not for drop shippers. If you fancy yourself an Alibaba arbitrageur, unsubscribe right now. If your twitter handle is something like @BowtiedBlackHatAlphaUtopian, do yourself a favor and get out of my mentions. And if you have no idea what this paragraph means, I’ll offer an explanation at the end of the newsletter.
The three scenarios I outline in the tweet above will make growth through Facebook ads challenging. You may be able to overcome one of these issues. But if your business is plagued with two, or all three, your odds of making money from Facebook (or paid media in general) are incredibly low.
That doesn’t mean that your business is doomed to fail, it just means that Facebook may not be the right place for you to seek growth.
Low Repeat Rate
Something that isn’t discussed nearly enough in eCom land: your product, your category and your customer’s relationship to your category are 80% of your retention rate. Marketing can help lift the baseline. But marketing won’t convince your average customer to buy three cars or 20 pairs of shoes per year.
For this reason, first to second purchase conversion rate is a better measure of product and merchandising performance than it is of marketing performance. You can market the pants off of a product, but if the product is disappointing, no one will come back. Similarly, if you don’t give people a reason to return, they won’t come back.
Go and measure what percentage of your new customers purchase again within a year (or pay me to do it for you). Then see where you fall on this scale:
- Great!: Of every 100 new customers you acquire, >30 return within a year.
- Average: Of every 100 new customers you acquire, 20 – 30 return within a year.
- Bad!: Of every 100 new customers you acquire, <20 return within a year.
If fewer than 20% of your new customers repeat purchase, it could mean a number of things:
Your product is bad (sorry!). People don’t like it, so they don’t come back to buy it again. If your product return rate is high and you receive a lot of customer service complaints, this is probably your issue. Misrepresenting your product in marketing increases the odds that consumers will perceive it as “bad”.
Your assortment architecture needs help. People may be satisfied with their first purchase, but they don’t find anything else they want to buy from you. This is a big issue for fashion brands that don’t have a core assortment. It can also be an issue for brands that launched with a single product and then tacked on additional products without merchandising experience or strategic analysis.
You recently changed your product or assortment dramatically. This can lead to accelerated churn if it is not done strategically. Your customers are expecting hamburgers, but they show up and the only thing on offer is kale salad. So they go elsewhere.
You’re pushing past your CAM in an attempt to “blitzscale”. Yes, you can acquire new customers with aggressive and highly promotional tactics. But those customers are going to be less likely to return. Groupon is a great example of this phenomenon. Building customer affinity at scale takes time, and “hacks” often lead to poor customer retention rates.
TL;DR: A low new customer retention rate typically indicates product acceptance issues if you’re selling multiple SKUs. You will struggle to figure out which part of the assortment “works” on Facebook…because none of it quite “works” outside of Facebook.
If you’re selling a single product, you may be able to run Facebook ads profitably…for a while. But you’ll eventually exhaust your total addressable market and hit a wall where you’re unable to break even.
If your retention rate is in the “Bad!” bucket, figure out why and fix it before you invest in ads.
Aggressive MER Targets
MER stands for Media Efficiency Ratio. This is your total dollars spent on media during a period of time divided by your total sales for the same period of time. In the post-iOS14 era, MER has become a reliable benchmark for the profitability and relative efficiency of ad spend.
If your MER is 100%, you’re spending one dollar on marketing for every dollar of sales you earn. If your MER exceeds 100%, you’re spending more on marketing than you’re earning in revenue, which is not a sustainable situation.
In a mature business, MER can disguise unprofitable acquisition spend when the business has a solid base of sales from returning customers. You might be acquiring new customers at a loss, but strong email file performance enables you to make a profit on the day anyway. This is…slightly more sustainable, but it doesn’t enable good decision making.
If you want to isolate the performance of your acquisition spend, you can use a sister metric: aMER (or Acquisition MER). This is your total dollars spent on acquisition media divided by total sales from new customers. I exclude campaigns that explicitly target existing customer lists from aMER spend, but I do not exclude retargeting.
All that being said, if your MER target is lower than 15%, you are budgeting for demand capture, not demand generation. A MER target of 15% implies a ROAS target of 6.7x. If you’re achieving a 6.7x return on your acquisition campaigns, demand generation is occurring somewhere outside your digital ecosystem.
Back in 2012, some brands could achieve an average ROAS of 5-10x on their digital spend because competition in eCommerce was much lower, and many “IRL” consumers were starting to shop online. Some of those same brands have not changed their cost structure or marketing profitability targets in a decade. You do not want to work with, or for, one of these brands.
Giving your digital marketing team a MER target lower than 15% often signals a lack of financial or strategic acumen on behalf of the brand. Of course, some brands do have a robust demand generation scheme that exists primarily outside of digital media. Or they may be a brand with global household name recognition. Target and Louis Vuitton don’t need to lean on Facebook ads to acquire customers; they’re playing a different game.
If you’re dissatisfied with your sales growth and looking for Facebook ads to “save the day”, a MER target lower than 15% ensures you’ll fail before you get started.
Facebook Is Your Only Consistent Source Of Demand
Building a brand through Facebook alone is harder than ever. If you plan to use Facebook ads as your primary growth channel, you need to engineer your product and your cost structure to align with what “works” on the platform. This means product margins of 75-80% and a product with a big TAM that solves a pressing problem in people’s lives.
Here is a great example of a product that is engineered to “work” on Facebook. I bet at least one of you who clicks on that link is going to convert. If your product is not engineered for Facebook, it’s going to be hard to acquire customers profitably.
Some brands who claim to have a diversified marketing strategy still depend on Facebook for demand generation. And that is because they fail to measure the impact of their other marketing activities, if they measure them at all.
A few examples:
Wholesale is not consistent demand generation for your brand. You may see a pop in eCommerce sales when your brand launches in a new wholesale account…or you may not. Three styles buried in a rack are not going to drive a wave of consumers to your website.
Traditional PR is rarely going to translate into eCommerce demand. I’m making a distinction between traditional PR and what is sometimes called “performance PR”. Traditional PR operates in a silo, is concerned with print coverage and total “impressions”, and seeks out those impressions with no consideration of overall brand strategy. Traditional PR is “spray and pray”.
Affiliate, retargeting and branded search are primarily demand capture channels. They don’t generate demand. You’ll often see efficiency in these channels decline along with new customer acquisition.
Certain brands and industries have “sacred cows”. These are marketing activities that worked well when the brand was founded or are considered “things we do as a (category) brand”. The return on these activities is rarely questioned, and has almost certainly decayed over time. Fashion shows and catalog mailings are two examples.
If Facebook is your only consistent source of demand, you need to play by the platform’s rules. Expecting Facebook to make up for deficiencies in your other marketing activities while holding it to a higher standard is a fool’s errand.
Why Do I Call Out Drop Shippers?
I call out drop shippers because they have a habit of calling me out first.
First, let’s do some context setting. Drop Shipping is an eCommerce business model where you find a mass-produced product on a vendor marketplace like Alibaba, set up your own online storefront to sell the product, and then pass the orders on to the vendor to fulfill.
The drop shipper never has to design a product or invest in inventory. And this makes the drop shipper the ultimate middle man. If drop shippers perform a service at all, it’s making a given product more trustworthy or digestible to the local market.
Most drop shippers break all three rules from the top of the newsletter. They sell one product, so their new customer retention rate is low. And that product is often junky, making the problem worse. Their MER targets are aggressive because the margins on drop shipping can be quite low. And Facebook is their only source of demand, because that is the crux of the business model.
Circa 2014-2016 it was easy to make money on a drop shipping business because Facebook CPMs were low and consumers were less familiar with (and therefore less suspicious of) the model. It was a pure arbitrage opportunity. And like most arbitrage opportunities, it was quickly competed away.
Can you still do drop shipping profitably? Maybe. But it’s nothing more than a short term arbitrage opportunity. You’re trying to find a widget that costs $x with a large-ish pool of people willing to spend $x*2 on it. But once you find the limits of your CAM, you’re done. It’s time to shut ‘er down until you can find another widget to pimp.
When you read my advice, keep in mind that I’m telling you how to build a sustainable, profitable business, not how to do arbitrage.