Advertising to Sales Ratio for Ecommerce, Explained
From small brands to global companies, most ecommerce businesses seem to be hyper focused on attribution when determining their marketing efforts’ success. Rather than looking at the big picture using an ads to sales ratio, many judge specific digital campaigns on a pass / fail basis. They either directly generate purchases or they don’t.
The ability to track attribution has always been one of the massive advantages of digital advertising. But it’s getting increasingly difficult to do so accurately. Changes in privacy for user data has blurred our ability to track behavior post click. This makes optimizing and reporting on ad campaigns a bit of a guessing game.
However, even before those changes, our industry had come to rely on attribution too heavily. Ultimately there should be a balance between an awareness of attribution at the granular level and a top-level metric that allows you to quickly judge overall marketing health.
In this post, we’re going to show you the problem with judging ad performance by attribution alone and explain the advertising to sales ratio, a much simpler metric for identifying whether your marketing program is healthy.
The Problem with Attribution at the Campaign or Channel Level
Are you looking at each ad platform independently and deciding success based solely on direct return? Or worse, are you looking at individual campaigns, ad groups or ads? If so, you are going to burn out quickly. And more importantly, this method will not help you succeed at scale.
Hyper-focusing on attribution at a campaign or ad level is problematic for a couple of reasons.
First, when a customer thinks of your brand, they most likely won’t think of a singular Facebook ad, Instagram reel, or Google listing. They’ve probably experienced all three. In fact, most often, customers will see your marketing across multiple platforms before they finally make a purchase. With that being the case, you almost never have “clean” data to make a decision about campaign performance based on attribution.
Second, ad platforms and the campaigns that run on them serve different roles in the customer journey. It’s best to think of them as a team of elements working together, not as elements running in isolation. This is a huge mindset shift!
For example, a business owner might say “I’m not seeing a lot of return on Google search, so I’m going to shut it off and just focus on Facebook instead.” That is really short-sighted thinking. What about the customers who saw your ad for dog beds on Facebook and then searched on Google three days later for the best dog bed on the market? If your ad doesn’t appear at the top of their search results, that customer (who you spent money on Facebook to reach first) could purchase from a competitor.
Of course, campaign performance should be monitored as your media buyer manages the ads day-to-day. But a sophisticated strategy understands the different roles that different channels play. It judges performance according to the results they are optimized to achieve.
Not every campaign is meant to get purchases. Some are for starting conversations or getting shares. Others inspire Google searches for more information. Others just plant a seed for retargeting later.
Think of this as a football team. If a coach judged each player by how many touchdowns they scored, many all-star players would look like failures. The quarterback would probably be the first to get cut. But that would be a mistake because the quarterback plays a vital role on the team, even though his job is not to score touchdowns.
The Best Top-Level Metric: Advertising to Sales Ratio
Knowing that it’s best for all channels to play together as a successful team, it’s helpful to have one high-level metric to help you judge the health of your marketing efforts at a glance. The simplest way to do this is to calculate your advertising to sales ratio.
To calculate the advertising to sales ratio, simply take your ad spend as a percent of total sales. For example, if your ecommerce store saw $50,000 in sales this month and you spent $17,500 in total ad spend, your advertising to sales ratio as a percentage is 35%.
Be sure to account for all ad spend, across all of your marketing channels. However, don’t include management feeds and team costs for this ratio (although those are important to track separately).
We recommend setting up a simple Excel or Google Sheet to track total ad spend, total sales, and the ads to sales ratio. Have your marketing manager update this on a weekly basis and review the numbers as a team each month to make sure the ratio stays healthy.
What is a healthy advertising to sales ratio?
At first, you might think that the lower your advertising to sales ratio, the better— but that would be incorrect. You can’t drive sales without marketing spend. Of course, you want to optimize your site and your ads so the marketing spend is as effective as possible. But there is a threshold of required spend in order to actually grow your business.
What counts as a healthy advertising to sales ratio actually varies depending on your industry and your business model. However, as a baseline, brands that are solely DTC should see anywhere from 35-55% of their sales spent on ads. Brands that cannot spend that much likely do not have enough of a product margin, which indicates a flawed business model. 35-40% is ideal for a business in a maintenance stage or maintaining a steady growth state. 40-55% is fine for a period of aggressive growth, but you shouldn’t stay there for too long.
How can I improve my advertising to sales ratio?
If you did this calculation and realized you are spending way too much on advertising, you need to start optimizing. Something is out of sync, either in your campaigns or on your website.
Are your ads generating clicks? If not, maybe you’re not reaching the right audience or you need to test new messaging in your ads.
Is your website not seeing purchases, despite your ads getting clicks? It’s likely time for conversion rate optimization.
An unhealthy ads to sales ratio indicates it is time to start digging into those more granular metrics like ROAS, conversion rate, and cost per acquisition. Look at the data to identify inefficiencies in your marketing channels and then you’ll have a place to start improving.
Your New Goal: Keep It Simple
Hyper-focusing at individual metrics for each marketing channel will make you crazy. Managing those metrics for each platform will only become more complicated as more marketing opportunities pop up. Instead of spending all of your time analyzing that, keep the big picture in mind by looking at what you’re spending on advertising in comparison to your monthly sales.
If you’re looking for advice on how to optimize your advertising to sales ratio so it’s more efficient, click below to get in touch with us.