The Right Way to Think About Paid Social for Early-Stage Brands
It all comes down to where your category more or less. But, before I explain, we need to go through some math. This is math that many founders don’t do before being sucked into a social media retainer.
The formula for evaluating the benefit of paid social to an early-stage brand is the same formula that software and web app brands use every day.
It comes in a few different forms, but ARPU (annual revenue per user) is the most commonly known.
Many smarter founders dismiss paid social media because of some significant and true mathematical variables: Cost-per-click (CPC) and cost-per-impression (CPM). CPC can tell a founder how many dollars it takes to drive traffic to a store locator plugin embedded on their brand’s website.
This is where smart folks do some basic funnel math:
- CPC = $8 (current average on IG/FB)
- ~35% of ad clickers who actually discover you online and then to the store to get a trial pack (presumably on sale due to the ad)(coefficient based on 2016 IAB research)
- 50% of those who try who repeat (assuming a strong product offering and average premium CPG repeat rates)
- 10% of those who try and become habitual users for at least a year (those for whom it was designed) who…
- = $8/35%/10%
- = $228 of ads to generate a habitual user
If the brand’s retail price is $3.50, its wholesale price $2, and its gross profit per unit 85 cents, then here’s what is required to generate meaningful return:
- gross profit per unit = 85 cents
- $228 = cost of ‘acquisition’ or 268 units sold
- A habitual weekly consumer would generate 50 of those units
- A habitual daily consumer would generate ALL of those units and more
- for every habitual user, the brand will generate another 5 consumers who bought one unit and four consumers who bought 2+ units or more over a few months but then stopped
- ARPU of habitual weekly consumer = $175
- ARPU of a daily consumer = $1,277
- AR of incidental, temporary consumers (20 units) generated = $70
So, as you can see, the frequency of habitual users is key to generating meaningful ROAS (return-on-ad-spend). In retail, they are the equivalent of DTC subscribers. In other words, they are vital.
If you are a beverage company amenable to daily consumption or multiple units per day weekly average, then paid social advertising works fine as long as you have the cash to scale up its effect in a specific city.
But, you have to already know if you even have fans consuming your product at this gonzo frequency and volume. And this requires you to be in business for a while AND have a way to do meaningful consumer research on the frequency of your most extreme consumers.
The more your gross profit plunges below 50 cents per unit and your purchase frequency goes lower than weekly and average purchase volume is less than five units, the less productive paid social ads can ever be.
This is why paid social works so well and is often deployed by soft drinks and alcohol brands; this macro-category generates this level of consumption frequency. Basically, if consumers consume your category multiple times per week or daily AND consumers shop the category at 5+ units per trip, then paid social can work for a retail brand. Yogurt, beer, wine, soft drinks, bottled water, nutrition bars, etc.
However, for the rest of you, paid social advertising is rarely going to generate returns without spending very high monthly minimums on campaigns. This is why I recommend people stay away until Phase 4 ($30M+ in POS sales).