The Ugly Truth About “Return On Ad Spend”
If you’re like most business owners, you probably don’t want to work your whole life. You don’t want to just limp from project to project. You want your company to make enough money that you can hop on a plane and fly anywhere you want at a moment’s notice.
And you know what else? You probably have no idea what your target return on ad spend is. “Sure I do,” you say “I just want to make more than I spent”. Guess what? That’s called “positive return on ad spend” and it’s not what you think it is; you’ve been fooled by marketing agencies who want your money (and you’ve probably given it to them).
The truth is most businesses have no idea what their target return on ad spend (ROAS) is. Why not? Because they’re busy managing Bob’s ego, Tracy’s budget, and oh that’s right, the rest of the business! If you’ve been in business for a while, you already know that you have to spend money on marketing.In the back of your mind you might say “when I land a few projects, I’ll invest into marketing”.
But what do you do instead? You spend time building out your web page for prospective clients, you post on Facebook to show that you’re a real person, you post your portfolio links on Slack & Discord forums, and some of you even take online marketing courses to get around the fact that you need to invest in marketing. Look, marketing probably won’t not take you from 0 to 5 customers; quality work and referrals will.
However, the ugly truth for most of us is, to go from 5 to 100 customers and from 100 to 1,000 you actually have to spend money on marketing. That’s real.
So, you’ve realized this ugly truth and now you look toward paid marketing strategies. You don’t have the time or the budget to hire a full time marketer, so you take it upon yourself to advertise. You start running Facebook and Instagram ads; “oh, what the hell, let’s try LinkedIn ads while we’re at it”. Fast forward two weeks and you’ve got 4,000 impressions, 10 clicks, a form submission, and a sickening realization that LinkedIn is really expensive.
Marketing sucks.
So, now you’ve got a few choices
Continue marketing by yourself and beat your head against the wall
Hire a marketing agency
Whether you take route 1 or 2, you need to focus on your Return On Ad Spend (ROAS). You need you to calculate your Target ROAS right now. Why? To protect yourself from shitty agencies that take your money and get you nowhere! If you spend $5,000 a month on advertising and you earn $5,001 dollars in business from those efforts, are you profitable?
No! You had to pay an entire team to earn that $1! However, $5,001 is technically giving you a positive return on your advertisement spend which is exactly what most agencies promise! They’re basically promising that you’ll operate at a loss.
So, the big question is, what ROAS do you need?
Well, first figure out your margins. If you don’t know them, you can do that here or you can just estimate for the sake of time. Now let’s do some basic economics. Buy a $5 chair, sell it for $10 and spend $5 on ads. You just broke even.
In this example you have a 50% profit margin. And for every dollar you spent on advertising ($5), you made $2. That means your target ROAS needs to be above $2 in order to make any money with this chair. Now, what does that look like for a development company?
If your company runs 40% margins then you need a $2.50 return on ad spend in order to break even (math is here). Your Target ROAS for every campaign needs to be above $2.50 in order to make any money! “Well, how the hell do we immediately calculate our ROAS if our projects take 3-6 months to finish; we aren’t exactly selling chairs here!” That’s a fair question. Just put a $ value on every form submission that comes from an ad campaign.
Say, on average, you deliver a $10,000 project. You also convert 1 in every 100 form submissions (like your “get a quote” page) into paying clients. What’s the value of 1 form submission? $100. Think of every form submission as worth $100, and you now have the power to immediately calculate the ROAS for any ad campaign.
Even better, you can hold your marketing agency accountable to your Target ROAS and understand if they’re worth what you’re paying them. You’re in the driver’s seat now. It feels good, doesn’t it?
PS See if you qualify for our $3.00 - $10.00 Guaranteed ROAS Program; now you know how to hold us accountable ;)
