The First Thing You Should Do Before Starting a Performance Marketing Campaign
Here’s a list of what you don’t need to do at the very start.
- DO NOT start by wondering which platform to use.
- DO NOT start by creating a media plan.
- DO NOT start with what creatives to put where.
- DO NOT even discuss performance marketing campaign.
Most of the times, you are pulled down by the weight of trying to figure everything out in one go. Performance marketing, above other things, is about understanding numbers.
So, start with NUMBERS instead. The actual business numbers.
It sounds so simple and that new entrepreneurs almost skip it.
All you have to do is start with a list of questions that you can answer precisely. The idea is to list down your key business numbers.
- What’s your store average order value (AoV) going to be?
- What are your average product margins — Gross Profit Margins?
- What are your margins after adding shipping and packaging cost — Net Profit Margins?
- If possible, try to get an estimate about RTOs by talking to people in your industry
Once you know these numbers, you can now CALCULATE the breakeven ROAS.
If you don’t know how to do that, here’s a simple mathematical formula.
Breakeven ROAS = 1 / Net Margin
So, to calculate your breakeven ROAS, all you need is to know your net margin. Now, comes the interesting part.
You can now easily calculate your Breakeven Cost Per Acquisition.
Breakeven CAC is the cost at which you should acquire a customer that you’re not making any loss on every sale.
You can calculate your breakeven CAC using this simple formula.
Breakeven CAC = AoV / Breakeven ROAS
Here’s a quick example.
AoV = ₹1,000
Gross Profit Margin = 40%
Net Profit Margin = 30%
Breakeven ROAS = 1 / 30% = 3.33
With breakeven ROAS in front of you, you can find your breakeven CAC in seconds.
Breakeven CAC = AoV / Breakeven ROAS = ₹1000 / 3.33 = ~₹300
Start thinking about platforms now
With your numbers in place, you can now start thinking about how to use Google Ads or Meta Ads.
Or, for that matter, whether to use performance marketing at all.
You can talk to your agency or people in your industry what the CPMs or CPC they are getting. Using these numbers and assuming your CTRs and conversion rate, you can get an idea of what CACs will look like for you.
Here’s a quick example.
Let’s say your expected CPC is Rs 15 and your conversion rate is 1.5%. You can use this information to calculate expected CAC.
Expected CAC = (CPC x 100) / Cov Rate = (₹15 x 100) / 1.5 = ₹1,000
Now you can compare your expected CAC with breakeven CAC. That’s what will determine what your performance marketing strategy — which platforms to use? Whether to focus on top of the funnel or bottom of the funnel? Whether to focus on retention or scaled acquisition?
Start with the numbers. Everything else comes after that.