Growth vs profitability. Finding that sweetspot

Tom Portsmouth
August 29, 2023

One of the biggest challenges and most common questions we receive is “how can we set the right target for our digital marketing activity?”. The answer itself is very dependent on each individual business and its objectives. However, there is a testing methodology and process you can follow to strategically set these targets in a way to maximise each digital marketing channel's performance once you can articulate what the role of the channel is in your marketing mix.

Identifying what success looks like for you

Before you can think about setting a target the first thing you need to know is what role this digital marketing channel is going to play for your business. To know this, you need to understand that fundamentally you’re balancing two heavily linked driving factors when setting targets for your activity:

  1. Revenue & volume* driver
  2. Profitability & margins driver

Therefore your first step is to decide how you are wanting to use this channel and subsequently what your acceptable Return on Ad Spend (ROAS) targets for this activity are. These can be derived from the Return on Investment (ROI) thresholds for your business. If your activity is to focus on driving volume you would expect to have lower acceptable ROAS thresholds than if you were to be focusing on profitability, where the return on ad spend and increasing the business profitability is of higher importance, meaning the acceptable ROAS will be higher.

*For top of the funnel, non-revenue activity you can substitute revenue for the activities goal/KPI

Introducing the curve

The challenge that is often faced at this point is knowing exactly what that ROAS should be within your acceptable threshold, to maximise the volume driven from your marketing activity. If you set too high a ROAS target you’ll limit the volume too much, whereas if you go to the other end of the scale you can lose too much money on your activity.

Making a great return per sale but not reaching volume targets, or making big sales numbers but losing too much money on these sales; both can provide big risks from a business perspective.

When looking to set the best target - based on what success looks like for your business (your acceptable ROAS range) - the best way to begin to visualise this is to think of it in the form of a curve:

The goal is to find where on the curve lies the best spot within your acceptable ROAS threshold to maximise revenue, the sweet spot.

Testing strategies

How do you go about finding this sweet spot?

As each business and activity is going to be different there are no quick win answers, instead it involves you needing to build out a testing plan in order to find that sweet spot for you specifically. Through strategically changing the targets for your digital marketing activity in question within that ROAS threshold you can begin to plot the impact to revenue at each breakpoint, to fill in the curve and find the optimum point for your activity.

For example:

You have identified that you want to use your PPC activity as a volume driver over profitability and from a business perspective the ROAS that can be acceptable is between 1.5 to 3.

Strategically you can test running the activity beginning with targeting an ROAS of 1.5 for a designated period of time before increasing to the next break point of 2. This is repeated for 2.5 and 3. With the sale volume recorded to see where you begin to get a diminishing return for the lower ROAS investment (if at all). 

From there you can identify where that sweet spot for your activity lies on the curve; to maximise revenue within your business’ acceptable ROAS range. 

The gap between breakpoints might need to be shorter or larger depending on the amount of data you are receiving and the testing window you have.

Taking it to the next level

This methodology to find the best ROAS target based on your goals is a great methodology for setting your best base target for the channel's activity. It is however limited by the fact that it only incorporates overall sales volume driven by the channel, but we know in ecommerce there are various other levels of complexity to the business we might want to consider overlaying on top of this.

For example:

  • New customer acquisition (NCA) and lifetime value (LTV)

Where you may be willing to pay more for new customers, and their subsequent purchases beyond that original first purchase.

  • Product Category and/or Brand margins

Where you will have varying margins on your products you may be willing to spend different amounts to drive sales on each one; maybe product category Y the margins are tighter compared to category X where they are higher providing potentially more opportunity to be more aggressive with your targets.

Overlaying these examples will result in you modifying that acceptable ROAS range. You will therefore want to set different ROAS thresholds and testing on particular activity that is targeting these different brands, product categories or activity that can distinguish when it is driving a new customer over an existing one.

This enables you to go to a more granular level with your target setting and optimisation of your digital marketing activity to more strategically set the best targets for your digital marketing to meet your specific business objectives.

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