As a DTC business owner, it’s easy to find yourself working in the business rather than on the business.
We’ve had the pleasure of working with brands with a strong product offering and excellent customer service.
While these contribute in their own way to being profitable, there is another area alot of business owners neglect.
And that is knowing their numbers.
Alot of owners we’ve talked to, express how overwhelmed they feel with not being able to figure it out.
While I agree that staring at a big excel sheet with rows of numbers waiting to be deciphered can be stressful, it is important.
The simplest answer to this is -
Only when we know our numbers, can we fully understand how healthy our business actually is.
It’s the single biggest lever you can pull in your business.
I can't stress this enough.
I once worked with a client who used facebook ads to sell his hardcover books. The stressful part of our entire working relationship was that he didn't know his numbers!
One day his fulfillment costs were $8 and the next day they were at $12.
And because of this, we were never able to determine whether he was truly profitable or not.
Could he afford a CPA of $20?
Or did he have to maintain a CPA of $17. I couldn’t tell.
Needless to say he wasn't a client for very long.
Now I’m sure most of you business owners out there do know your hard costs. Or else you wouldn't be in business for very long.
But when I start talking about your Facebook numbers, that’s where I see alot of blank stares.
So today that's what I want to talk to you about. And how these numbers affect the profitability of your business.
I’ll also be sharing a calculator at the end of this article.
Simply plug in all your data and the calculator will tell you how profitable your business is.
Or use the calculator to understand what areas you do need to focus on to increase profits.
You can also take your findings and speak to the marketing agency you’re working with. Let them help you dial your numbers in.
ROAS stands for Return on Advertising Spend.
Simply put, ROAS measures the revenue your business earns minus expenses.
For DTC brands, all hard costs plus marketing costs should be considered under expense.
A ROAS of 2 means if you’ve spent $1 on marketing, your business makes $2 back.
Your ROAS can fluctuate depending on the product you sell or the stage you’re at in your business. For example, if you’ve just started out, your ads could be getting you a 3X ROAS. If you’re more established and scaling your spend your ROAS could be at a 1.5.
AOV stands for Average Order Value.
AOV tracks the average dollar amount a customer spends on your website.
You should be continually working on maximizing your AOV. Upselling and cross selling are some of the ways you can go about doing this. Amazon does a good job of showing customers what others have bought along with the product they’re purchasing.
Bundling products works well too for increasing AOV.
CPA stands for Cost per Acquisition.
This metric tells us how much you’re paying to acquire a customer.
CPA’s fluctuate depending on the industry you’re in. If you’re selling a luxury item, expect your acquisition costs to be higher. This is because the customer needs more touch points from your business to be interested in your product. Whereas if you’re selling something like a fidget spinner, the buying decision can happen in literally minutes. Your CPA’s would be relatively cheaper.
CPC stands for Cost per Click.
CPC measures the price you pay when someone clicks on your ad.
You want to keep your CPC as low as possible. A low CPC is a good indicator that your product is liked by many.
To lower your CPC, focus on creating thumb stopping content. For alot of my clients, I change out headlines in the ad copy or introduce text to my images to try and lower cpc.
If you can present your offer in a way that is clear and concise, you’ll be able to grab your customers attention and thereby reduce your cpc.
CTR stands for Clickthrough rate.
This metric measures how often people click to your website after seeing your ad.
Aim for your CTR to be as high as possible. A high CTR indicates people are interested and they are willing to learn more about your product.
You can improve your CTR’s by being absolutely clear about our offer. Tell people what the product is and how it can help them.
CPM stands for Cost per Thousand Impressions.
This metric measures how much you’re paying for 1000 people to see your ad.
CPM is a harder metric to control since it is platform dependent.
CPM’s will also fluctuate depending on time of the year. During Q1 you will see much lower CPM’s compared to Q4. This is because in Q1, you have a relatively small number of advertisers bidding for the same customers. Whereas in Q4, everyone and their mother is advertising to your customer. The CPM you pay is a good indicator to understand how competitive your market is.
CVR stands for Conversion rate.
How your website performs is perhaps the most important metric to consider.
Understand this - Facebook is a platform that changes everyday. And we have ZERO control over it.
Today you could be paying less than $1 for a click. Tomorrow something happens and your CPC could rise to $3. It’s out of your hands. What you can control though is how your website performs.
If you’re just starting out, your website’s CVR might be really low. By consistently working on improving your product pages, site speed, and usability you ensure your consumer has enough information to make a buying decision.
A good sales page CVR for DTC businesses is anywhere from 3 - 6%.
LTV stands for Lifetime value.
LTV measures how much revenue you’re generating from one customer throughout his/her relationship with you.
Any established business will tell you that the relationship they have with their previous customers is much more valuable than acquiring a new customer. Why? Because if someone has purchased from you, they’re likely to buy again, with very little effort.
People who buy the iphone, go back to Apple to buy their airpods, a laptop, iMac etc. By curating products around its main product, Apple ensures their customers keep coming back. This is why their LTV is high.
That's all folks! Hope this post will help you get a better understanding of your numbers. Look at these numbers month over month. And watch for trends. Every month, pick one metric that needs improvement and start testing ideas.
As promised, you can download the calculator here.