Am I Spending Enough On Meta Ads to see it “working”? This is one of the most common questions I get, so I’ll answer it here.
This content was originally published in the No Best Practices newsletter on 07.14.2024.
This week’s newsletter comes to you courtesy of my Ask Me Anything form. Click that link to ask me a question and you could be featured here (free advice!).
Question:
The biggest issue I see with many brands/clients is low ad spend. Spending about $10-$50 a day.
First question is what do you think the minimum ad spend should be for an eComm business? Is it a factor of their AOV?
Secondly, for bootstrapped businesses is taking out a loan the best answer to fuel their ad spend until they can hit somewhat of a growth flywheel?
Answer:
This is a popular question: how much do I need to spend on Meta to get my brand off the ground?
There are two components to the question: (1) what minimum daily budget do I need to give the campaign a chance at success? and (2) how much do I need to spend to determine if product-market-channel fit is possible?
I’ll also cover a third question: (3) should I pursue outside financing, and if so, how?
How To Set An Effective Minimum Daily Budget
At a minimum, you need to set your daily budget to match your AOV. Ideally, you’d set the budget to 2-3x your AOV.
You need to give Meta enough budget to drive at least one conversion per day consistently. Unless you’re extremely lucky, your first conversion is probably going to come in below your target ROAS.
Let’s say your AOV is $150 and your target ROAS is 2.5x. Set your daily budget to $150-200.
Once you’ve identified an ad creative that is consistently driving at least one conversion per day at your target ROAS, you want to scale up your daily budget to enable at least 50 conversions per week. This will give Meta enough data to fully optimize your ad.
For the brand above–$150 AOV, 2.5x target ROAS–you’d want a daily budget of ((150/2.5)*50)/7 = $429/day.
You probably want to get from $200/day to $429/day by increasing campaign budget by 20% per day every 2-3 days. Don’t do it all at once; you risk resetting your campaign learnings, especially if this is your first campaign.
Of course, you might find that your ad doesn’t have enough staying power to sustain 50 conversions per week at your target ROAS. If you start to see performance decay as you scale, start to taper the budget back down by 20% every 2-3 days.
Hitting that 50 conversions benchmark can improve your ROAS by ~10-15% and make performance more stable. It won’t take an ad that’s generating a ROAS of 1x and transform it into a 3x. If your ad is wayyy off your target, don’t bother scaling it in an attempt to improve performance.
Side note: there is an alternative creative vetting method you can run with cost caps. I’m going to cover that in a future issue of the newsletter.
Before iOS14/when Meta was less competitive, you could scale an account by running dozens of $10-15/day micro campaigns. You can’t do that anymore. Maybe there is 1 in 1,000 brands who can still scale like this, but it probably isn’t you. Don’t waste your time doing this. Focus on creative, offer and path to purchase.
How much do I need to spend to determine if product-market-channel fit is possible?
Technically, the answer here is infinity. You could test an infinite combination of hero products, offers, landing pages, ad creatives and campaign structures. But bootstrapped brands don’t have the time or money to do that.
You need to draw two lines in the sand: the amount you’re willing to spend against a single ad creative before giving up on it, and the amount you’re willing to spend to validate product-market-channel fit (PMCF) for your brand.
A rule of thumb for ad creative: if you’ve spent $500 or 5-6x AOV (whichever number is higher) and haven’t driven more than a single conversion, the ad is a dud for now. But when you’re just starting out and have no data on what messages resonate, you shouldn’t spend this much.
There is no “rule of thumb” for PMCF validation. The smart way to do this is to draw a line in the sand based on your resources and what you’ve invested in product development. “I’m going to spend $5k testing this product. If it doesn’t work, I’ll test in another channel or develop a different product.”
You probably want to dedicate enough budget to run ~10 rounds of testing, keeping in mind the minimum daily spend guidelines from the prior section.
Using your testing spend, you want to be smart about where you’ll go broad with testing and where you’ll go narrow. Unfortunately I’ve found that, in some categories, you have to go realllly broad almost everywhere–bid types, pricing, offers, creative, etc.
I’m going to dedicate a future issue to “best practices” (I know) for Meta GTM in different product categories. I already covered Meta GTM for fashion brands in my fashion newsletter.
Don’t invest a ton of money in inventory until you’ve validated product-market-channel fit (PMCF).
Something you can do to validate PMCF with minimal investment is to run ads for a product that doesn’t exist, then refund peoples’ orders if you get traction. Then you can invest money in sampling and inventory and re-launch under a new name (to distance yourself from the customer frustration you’ll produce in the validation phase).
Should I pursue outside financing? If so, how?
But most entrepreneurs are shocked when they see the interest rates that DTC lenders are charging…and that’s because they have no idea how lenders calculate risk. Hint: if you’re not shocked at the interest rate, you’re not calculating it right and the provider is obfuscating the true rate.
Consumer investments are very risky. You never know what the “top” of in-market demand is going to be for your product, and numerous macro and platform factors can turn a winner into a loser overnight. Imagine what would have happened if you took out a loan in January 2024, right before Meta bug-pocolypse.
The truth is: you’re not going to achieve a sustainable growth flywheel until you’ve achieved 8-10 healthy years of growth. At that point, you’ll have a meaningful book of repeat customer business.
The faster you scale acquisition, the lower your repeat customer rate will get. Typically, the big spikes in customer demand correlate with poor customer quality; they’re impulse buys. This is what tripped up so many of the VC-funded DTCs that are now bankrupt or close to it.
A couple of caveats before I go further. The following advice assumes that you’re a bootstrapped entrepreneur going all in on a single brand. I’m assuming that you don’t want to pursue a high risk, high reward strategy that could kill your business prematurely.
If you’re running several businesses, trying to max upside, and you’re not afraid of any single business failing, feel free to disregard and lever up.
Ok, onward…
You should aim to make first orders contribution margin-profitable. You shouldn’t try to scale faster than that benchmark allows. Once you’re doing enough volume to cover fixed costs, this ensures that you won’t need to take on debt to fund the business.
The exception to this rule is inventory purchasing if your lead times are long. Some brands open a revolving line of credit with a bank to cover this. Others use credit cards. Others use DTC lenders. Others use pre-orders.
Again: I would advise caution here. If you make inventory bets based on a best case projection, you’ll run out of money if reality presents a worst case scenario.
Instead of taking on debt to grow, I would advise brands to examine each line item of their variable costs and figure out ways to make more money on each order. Can we reduce COGS? Can we reduce shipping costs? Can we charge a higher price, or shift more of our customer acquisition into higher margin offers?
Good rule of thumb here: if your business is <5 years old and growing primarily through Meta, don’t seek outside financing for any expenses you wouldn’t truly feel comfortable putting on a personal credit card.
There is no “alpha” in 3rd party financing, unless you’re getting a family loan from your rich uncle. You’re borrowing from folks who have “studied the blade” w/r/t interest rates.