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PPC Profitability – The Math for Ecom Stores?
I’ve been crunching some numbers to look at breaking down the profitability benchmarks of PPC advertising based on some of the data I’ve seen as a tiny startup since kicking off our e-commerce adventure.
The data below is loosely based on data I’ve been seeing from our ads account and i think this warrants some discussion from the paid media e-commerce experts.
A Google Shoping Scenario (very basic example):
Start-up e-commerce store selling physical products (Retailer)
Gross Profit Margin: 40%
AOV: £34.99
CLV: Unknown as new store
Conversion Rate – 1%
Daily Budget £100Running a Google Shopping campaign for a brand new store using the above scenario would require a CPC of £0.14 to run at break even. Of course, that CPC is not very realistic.
Running the above scenario at a much more realistic CPC of £0.50….brings in a net monthly loss of cc. £2.1k. Simply not financially viable, of course.
For the purposes of our example, let’s assume that to be competitive on the shopping channel we need to keep the CPC at around £0.50 (I get it that this may still be too low for some industries). This would mean that we’d need to pull on other levers, such as AOV and CR, and make improvements.
So what would happen if we improved the conversion rate?
Well, running the above scenario at a much more realistic CPC of £0.50 would require a conversion rate increase from 1% to 3.6% just to break even. That increase seems a little bit unrealistic to me.
What would happen if we lowered the conversation rate to a more realistic 2% and instead looked to increase the AOV?
Well, running the above scenario at a much more realistic CPC of £0.50 and a more realistic conversion rate of 2% would require us to increase our AOV from £34.99 to £62.99……just to break even…?
For us tiny e-commerce businesses just starting out in paid media these numbers can be quite sobering. I do understand the importance of AOV across certain paid channels and I also get the need to look at paid media costs from a CLV perspective, but when you break the numbers out like this it makes you realise why e-commerce is a truly complex and harsh business model to master.
For those of you with successes at tackling and overcoming these numbers across paid media (as a brand new start up), either for your own brand, or within an agency environment for a client, it would be great to hear your views, experiences and any tips you may have on battling through these challenges. ??
I’m off to think a LOT more about my owned media…..
Best,
Gentile -
1 Reply
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First thing, I love this – digging into numbers is how you find the best opportunities. There’s a few red flags for me:
* Gross Profit Margin: 40% | This depends on the niche, but man, I want to see at least 70% gross margin if I’m doing Ecommerce.
* This is almost a disqualifying factor on its own. You need to have an in-depth plan for retention/lifetime value if your margins are 40% **and then** you need the capital to run the business for ~2 months while you wait for return purchases.
* AOV: £34.99 | Same thing with AOV. I’d want to see ~£52-£65 AOV just as a rule of thumb.
* If any of my clients don’t hit that mark, it immediately becomes my goal to fix that and there’s plenty of methods to increase AOV.
* Conversion Rate – 1% | You have low margins and a low AOV, in a sense your product should be a bargain purchase (maybe not, I don’t know the context).
* I would expect a 4-5% Conversion Rate with an AOV of £34.99. In my experience, CVR only drops below 1% if my AOV is greater than £200That leads me to:
1. Margin – Why is your margin so low? Are there ways you can improve this? Should you continue to sell this product in the first place?
2. AOV – Why is your AOV so low if your margins are also low? How can you improve AOV, or your 60-day LTV to have your initial investment pay off?
3. Conversion Rate – Why is your CVR so low? You’ve got a cheap product (too cheap it seems), so a <1% CVR is a bad sign. Where can you improve your experience or offering?People tend to try and fix their ads or marketing, when they haven’t made sure that their business makes advertising viable in the first place – this is a good place to start
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If your margin is £15 on a £35 pound product then it won’t be easy to make advertising work for you. Even if your CR is high and CPA end up being £8 to £10, that leaves you with £5 to £7 in profits. You’ll have to sell a large volume to make it work for you. And the larger the volume, the more staff you need to process shipments, returns, payroll, etc.
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Now this is Ecom!
Appreciate the figures mate. A couple of things to factor in to the profitibility of running PPC.
1. **Customer Lifetime Value.** It may cost ‘xx’ to acquire a new customer, but what is the return customer rate and how much are they worth to you over time?
2. PPC is a part of the whole marketing mix. Now that you have had a potential new customer click on your website, you can **retarget** them on meta or tiktok, continue selling to them via the highest return channel…email marketing, and you will also create a knock-on effect where if they have had a positive experience they can share it via referal programs, word of mouth, day-to-day exposure of your brand to the outside world.
3. As your business grows, you can use **economies of scale** and get better deals on your products to get better margin.
4. You **build brand recognition** over time and google starts ranking you higher, so you end up with an increasing amount of organic traffic eventually, but only after pushing through some expensive customers to start with.
5. Once you get more customers, you will have **better understanding of your target audience** and will be able to market to them more effectively, increasing your conversion rate. Committing to website improvements and visual media will play a big part in this too. 1% conversion rate is a good conservative number, and it’s very specific to industry, but you can go well beyond. My conversion rate on my ecomm store last year was 6.92%. It’s all about getting the right people to your store.
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I think you’re correct that an e-commerce store with a 1-2% conversion rate and $35 AOV can’t get profitable with google ads.
That same store, but with some contests and other lead gen marketing, driving email and sms nurture where you get 4-6% lead signup on top of your 2% e-commerce transactions conversion. Is still not profitable, because the incremental transactions you squeeze out of the leads will be 20-40% of the 5%ish lead signup rate. Let’s math this step.
CPC $.50, CVR (leads) 5%, CVR transactions 2%, $35 AOV
Return per $100 in clicks
First touch profit: (4 sales, $140@40% margin $56 – $100 ad spend = $44 loss)
Lead nurture profit (10 leads, 2 sales $70@40% $28 – $44 loss = $16 loss)Ok, still losing money… google ads is impossible, or only for those with unlimited access to venture cash and no need for positive cash flow right?
Maybe, but what if we add a $140 and $399 upsell product? We take our 6 customers per $100 in media and offer them a $140 or $399 product that we can sell at a more attractive 60% margin. If we convert 1% to the lower price and 1% to the higher, where do we end up?
Same priors but we’ll do it per ten thousand in media spend.
CPC $.50, CVR (leads) 5%, CVR transactions 2%, $35 AOV
First touch profit: (400 sales, $140@40% margin $5600 – $10000 ad spend = $4400 loss)
Lead nurture profit (1000 leads, 200 sales $70@40% $2800 – $4400 loss = $1600 loss)Upsells
600 entry level customers
6 $140@60% = $504
6 $399@60% = $1436$1,940 upsell profit – $1,600 first touch loss and now we are in the black a tidy $440 per $10k in media spend. And that’s with this pretty mediocre website we have converting at 2% Transactions and 5% leads. I see up to 4% transaction and 10% or even 20% with good copy and visuals, email only lead CVR fairly often.
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Great thread – although surely we should be talking about CPA not CPC but I guess math works out the same.
In my experience for the AOV your talking about 5 percent is not difficult
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I work with a couple of UK ecomm clients with similar AOVs and yes, it’s a continuous daily struggle to find a profitable way of using Google Ads especially given the changes to Ads over the last year.
One option that does work is to focus your Ad spend on the products with the lowest CPAs. These are usually (but not always) where you have the highest competitive advantage on price and/or availability. Like you said, it’s a very price sensitive channel.
I find that many clients don’t look closely at the individual products and just chuck a load at Google in a shopping feed, set too limited a budget and hope for the best! This can leave some products that could work well getting no (or very few) impressions and others that are working well consuming all the budget.
Your 2-3% CR is realistic, but when doing the above optimisations to your feed you can get CRs MUCH higher than this and lower average CPA per sale significantly. This is the way.
The main issue (which underlines your post) though is the general trend in ecomm. It’s getting so competitive on Ads that margins are being squeezed (by high CPAs) to the point where it starts to make little business sense to advertise. Even if you can find products that you can sell well, it is often not long before others undercut your pricing (usually but not always by bigger retailers). I’ve seen this repeatedly over the last decade or more.
One recent practice is retailers buying up the entire stock of a particular wholesaler so that they are the only one that stocks the product. (This happened quite a bit during lockdown when availability was challenging.) It is one (desperate) solution to the problem you are facing and you need deep pockets and balls of steel!
Regarding 80% margins, this is a fantasy unless you are peddling garbage. (Not a great long term business strategy!) Or you are lucky enough to be a DTC business with a niche product that few others can supply.
Finally, the cost of hiring PPC guys like us is high and that lowers margins even more… but we are usually worth it longer term! ?
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