What can I afford to spend on customer acquisition during the sales?
Your merchandising strategy directly affects how much you can afford to spend to acquire a new customer.
This is Marketing 101. But what’s not so well understood is how to manage allowable acquisition costs during sale periods and new product launches when your prices are variable and measurability becomes even more elusive. The thing is, you need to make sure your promotions aren’t eating into your long-term profitability.
Because you can do all the fancy marketing you like but if it’s losing you money then you’re just being a busy fool. And no-one wants that.
So what should you do?
Start with your average order value.
Many marketing teams work on ROAS as their key metric and apply the same ROAS targets all year-round. However, when you do something that causes orders to deviate from your standard AOV (like putting an item on sale or promotinga product that differs from your standard price points) then your ROAS target needs to change.
Let’s look at an example:
Imagine your brand sells £100 widgets (excluding vat) with a gross margin of 50%.
You’d breakeven on your marketing spend with a ROAS of 2.4.
However, if during your sale period you started selling widgets at 30% off, you’d need a ROAS of 4.2 to breakeven.
Consider the implications for one second – if you don’t understand this dynamic and your performance marketing team continues to spend to their 2.4 ROAS target during the sale, you’d generate a lot of sales and congratulate yourselves on a successful sale period.
But rather than breaking even, you’re losing over £6 on every order.
This might be considered the definition of a busy fool.
I know most of you work past breakeven to consider lifetime value, but the same dynamic applies; the target set using your customer’s lifetime value is also affected by changes to their AOV.
The key takeaway here is that whenever you’re deciding which product to use in a promotion (homepage, Google shopping bids, email heroes, catalogue front covers etc.),you need to make sure you understand what impact that product will have on customer spend.
From there, you can alter your success targets and we’re back to Marketing 101:if the product is cheaper than your AOV, you must spend less on marketing.
But if it costs more than your average you can spend more and be much, much more profitable.