Why Focusing On "Immediate" ROAS vs Profitable Scale Is the Biggest Thing That's Stops Your eCommerce Growth in 2020th.
Let's touch a topic that we have heard from many of our partners – "You can scale up as high as you can as long as you maintain the same ROAS it is right now."
Or "You can scale up as high as possible, but maintain ROAS 3+ because our profit will start to decrease."
And we can scale up like this, but only to a certain point. We often start to notice ROAS dip after we hit 3K to 4K daily ad spend mark with Facebook Ads. We see about -10 to -15% ROAS drop then we are trying to add +2-3K daily ad spend to these accounts.
Similar "tier" for the majority of the accounts also exists at around 9-10K daily ad spends. And around 15K daily ad spends.
And this is where the bottleneck starts. Usually, eCommerce owners get scared here. They notice their profit margins decreasing… Customer acquisition costs are increasing.
For us, it's obvious, but for eCommerce owners, it always takes long discussions and spreadsheets to prove to them that their decision not to scale further is costing them dearly.
So hopefully, this post will help to open a lot of eCommerce owner's eyes to possibilities out there and help you to see another side of the coin.
Now right to the topic.
There are key 4 reasons that make scaling up the best decision for 90% of eCommerce stores.
1. Total Profit You Receive
Let us put it into simple words.
Would you be happier with having 100K in Monthly Sales with ROAS 3, which would result in 30K profit?
Or… 400K in Monthly Sales with ROAS 2.5, which would result in 110K profit?
Or… 800K in Monthly Sales with ROAS 2.1, which would result in 170k profit?
To show our partners how powerful understanding of numbers can be, about 3 months we've hired a CFO to create personalized financial growth sheets that take into consideration absolutely all the expenses that the business has at certain stages of growth, calculates their EBITDA, amortization costs etc. and spits out final profit % and profit that each of our partners has at certain revenues / ROAS combos.
We're planning to put it in action to make highly educated decisions about setting the right goals and targets to maximize growth and profitability for our clients starting from Q1!
2. Lifetime Value of Each Acquired Customer
Once you acquire a customer, you never expect to make just one sale to them…
On average, you should be aiming to have 1.4 sales per customer in a year. With a second purchase considerably higher AOV than the first one. Which often put LTV of the customer at around 1.6-2.2 AOV's value.
It means that any sale you break even right now will bring you another sale in full profit!
We will talk about what we do to get these numbers in one of the upcoming AdKings Memos.
3. Economies of Scale
Economies of scale is an economic term, that means that by ordering a higher number of units, you can decrease your production costs, product fees, shipping fees, fulfillment, and customer support costs by doing things in bulk.
4. Exit Evaluation
If you are planning to sell your eCommerce business in a few years, higher turnover and a more substantial customer base help to increase its evaluation and make it much more attractive to potential buyers.
Now let's talk about a few problematic aspects of scaling that many of our eCommerce partners face.
1. Hiring and Business Structures Growth
You have to hire a larger support team, support team manager, additional people to help with business processes, and it has to become a real business instead of a solo activity. It adds complexity and takes time.
2. Cash Flow and Stock Levels Management
Often the biggest roadblock to scaling is the stock levels, which directly correlate with order lead times and cashflow a client has to make bigger orders. These two problems often force our partners to look for outside financing or to deal with suppliers into delaying the payments by 30 to 90 days.
3. Mindset Shift
This is a topic that not many of the business owners think then they hear about scaling. But as you grow, the owner mindset also has to grow and go through fundamental changes.
They have to understand that while you were a smaller business, they managed to do everything themselves and be an "executor" and "decision point" for everything.
As you grow, you need to become a "manager" who manages other people, creates the goals, supports, and let's go of control. That's the only way to grow while keeping the sanity.
On the good side, the bottom three negatives are pretty easily solved.
Also, while ROAS starts to go down on the acquisition channels like Facebook Ads, if you have the right omnichannel infrastructure that maximizes the client's lifetime value, you should be good.
For example, with a growth stack similar to our Everest eCommerce Growth Framework™, you can still expect to have ROAS 2.8 to 4.5 at the shop level, even if your Facebook Ads campaigns are running at ROAS 2-3.