🥗 ROAS is a TERRIBLE metric!

Hey there,

Welcome back for another bite to chew on. 

Today, we’re sharing a few of our major mess-ups around customer acquisition.

We hope this gives you some tips to apply to your business right away.

Our biggest mistakes revolved around these areas:

  • We were focused on the wrong metrics

  • We hurt profitability by giving too much away 

  • We were sleeping on behavioral economics principles

And the biggest problem?

We weren’t avoiding a silent killer - Vanity Metrics.

Vanity metrics seem important but they don’t correlate with business success.

In fact, they can give you a false sense of winning. 

Tool Of The Week

Before we get into it, we wanted to give a quick shoutout to this week’s sponsor.

We’re halfway through 2024 - and somehow, structuring accounts/how to run your ad account is still up for discussion.

What we are not going to do is start a debate between cost caps and automatic bidding. 

We all know everyone’s going broad, but there are other ways to target.

One of those is through interest-based targeting, but the con of that is that you’re increasing CPMs just to get a little more targeted.

But - what we recommend is to use highly precise, sourced lookalike audiences with a tool like Proxima.

They take billions of data points from across the eCom industry,

And their algorithm creates boosted lookalike audiences from those data points. 

This way, you can stop using data that Meta thinks is going to be a lookalike audience for you,

And use data that you know will work for you. 

Proxima’s AI Audiences make up around 50% of our current daily budget at Obvi - and it is definitely worth giving a shot if you’re just going broad. 

If you’re looking to expand your audience, don’t use Facebook’s native lookalike feature. Don't use interest-based targeting.

Continue going broad and test using Proxima’s lookalike audiences. 

Obvi’s vanity metrics 😒

Alright, let’s get into it.

We went from prioritizing only ROAS and MER to what really mattered most…

Contribution Margin.

The problem with these metrics – 

Let’s say 30% of your revenue is going towards ad spend but what does that tell you about new customer revenue? 

What does that tell you about returning customer revenue? 

What does it tell you about profitability?  

At the end of the day, ROAS and MER are just vanity metrics.

We moved on to tracking NCAC (new customer acquisition cost) and NCROAZ (new return on ad spend)

This is good if you know what your targets are… but it doesn’t tell you what you’re really adding to the business.

It doesn’t tell you if you happen to be hurting overall profit.

Our best pivot ever was focusing on contribution margin.

Traditionally this is an accounting term, so it’s interesting for marketers to pull it into your lexicon.

It never hurts to build that stronger partnership with your finance peers, right?

So - what is the contribution margin? A quick breakdown / refresher:

It’s your sales minus any variable cost in your business.

  • Cogs

  • Discounts

  • Pick & pack

  • Shipping

  • Payment processing

  • Marketing costs

If that number is positive = great. 

If negative = bad.

Rather than getting hung up on what’s only happening in the ad account, you should be looking at a blended contribution margin metric day-to-day. 

This way you can clearly see if your ad spend is driving profit. If it’s not, something needs to get fixed fast. 

Make it a daily habit to review your blended contribution margin across all marketing channels/funnels you are running.

Now, let’s take a look at how your offers can impact contribution margin. 

Offers and pricing go hand in hand - because behavioral economics teaches us that customers quickly and subconsciously evaluate your offer and pricing to decide its value and whether to buy it.

This evaluation affects both your AOV and your contribution margin - the mistake we made here was by trying to increase our AOV, 

We didn’t pay nearly enough attention to our contribution margin… 

Which hurt our profitability.

Ash’s thinking at the time was higher conversion at higher AOV would get us the best results.

So we created an offer with everything we could dream up: 

  • A 6 month supply

  • Shaker cup

  • Sample sticks

  • 3 free gifts

  • Apple cider gummies 

The works. Plus we included a hell of a discount.

They’d be stupid not to buy, right? 

The problem was we weren’t paying attention to how an offer this rich was impacting the business. 

When we added up all the COGs, the discounts, and the added shipping cost associated with the extra free gifts … we needed to be at a 2x ROAS to break even. 

For a brand spending $5k per day on meta ads at a 2x return on ROAS, scaling the business is going to be very difficult. 

So we went back and A/b tested it. 

CONTROL: Lower prices and lots of extra goodies:

Now for the BIG, BOLD TEST: 

We removed the gifts and raised prices on all purchase options.

We knew this would likely hurt conversion rates. And it did at first. But we knew we were in the hunt and decided to go all-in.

So to boost the conversion rate, we tested a bunch of different headlines and imagery, making sure our offer had the strongest positioning possible.

RESULTS

Even though the conversion rate was lower, the reduced COGS, fulfillment and shipping costs + higher MSRP resulted in stronger contribution margin.

Instead of needing a 2X ROAS to breakeven, we only needed to be at 1.4X… 

This meant it would be much easier to scale the business with a lower CAC. 

We’ve covered the most important metrics and testing levers like headlines and imagery. 

In addition, there are multiple offer types you should be testing:

Bundles

If you sell a consumable, you can test selling higher quantities or adding subscriptions to increase AOV. 

BOGOs

Especially for brands that want to avoid selling on a discount, buy one get one or buy two get one so you can avoid positioning the promo as 30% off (even though B2G1 is literally 33% off). 

Cash Back 

Another good way to avoid discounting your brand. Offering 20% cash back at the end of a transaction can be a strong incentive. 

Platforms like Fondu power this, allowing you to be aggressive with cash-back promotions and encouraging customers to return to your store.

Gift with Purchase 

Offer freebies that complement the purchase so customers can try other other products in your store.

Always Consider Price Testing

When was the last time you tested your pricing?

How do you know if you are selling too low? Or too high? 

Do you know what the difference would be if you increased prices by $10? What would that do for your contribution margin? 

We highly suggest price testing whenever you can. At Obvi, we increased our price by 33%, and it allowed us to scale. 

Consider Price Anchoring

Price anchoring is a consumer psychology principle where you show the highest-priced bundle first. 

Price anchoring sets a benchmark in the customer's mind, influencing perceived value and making lower prices or discounts appear more attractive in comparison. 

When we A/B tested swapping the one month and six month bundle, the AOV shot up to $80! 

If you want to see other examples of anchoring in action, look at how Apple presents the iPhone lineup.

Key Takeaways 

  • Make it a daily ritual to check the blended contribution margin in all marketing channels/funnels 

  • Methodically test your offer and pricing to reduce your ROAS break even for scale

  • Try the proven strategy of price anchoring

Upcoming Events

You guys have blown us AWAY!

SubSummit is approaching and our June 17th event is already at 200 people!

Don’t miss out on the biggest event we’ve ever thrown. Get on the list here.

Next Up: Creative Diversification

Our newsletter on Sunday will dive into the creative diversification of your ads.

We’ll share a framework for how you can map your creatives to ensure you are serving ads to a huge variety of customers.

To whet your appetite, here’s a quote from Henry Kelly, the head of e-commerce at Meta:

“Creative diversification, the art of embracing a variety of ad formats and concepts, emerges as the catalyst for reaching new audiences, rejuvenating engagement, and spurring action. 

This is a fancy way of saying that different people resonate with different types of creatives, so it's important to create a variety of ad content.

You won’t want to miss it! 🤞

If you’re looking to expand your audience, don’t use Facebook’s native lookalike feature. Don't use interest-based targeting.

Continue going broad and test using Proxima’s lookalike audiences. 

Got any questions or want to share the learnings about a metric you find valuable to ensuring healthy contribution margin? 

Reach out and tweet us - Ron’s Twitter - Ash’s Twitter

We love getting to know what you’re doing for your brand - so don’t be a stranger.

Until next time,

Ron and Ash