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Ep. 105Advertising ROAS and Repeat Purchase

November 1, 2023

 

Welcome to Episode 105: Advertising ROAS and Repeat Purchase. Snore. This sounds like a real snoozer, James. You put an acronym in your podcast episode title? Really?

 

Yes. Yes, I did. And I’ll make it up to you by starting with a painful story of negative advertising ROAS (return-on-ad-spend) for an early-stage snack brand.

 

The brand shall remain anonymous, as they all do on Startup Confidential. But it’s important to share why the $30,000 campaign didn’t work.

 

The first reason, honestly, but not the most important, is that the creative wasn’t memorable enough to create a surge in trial on very low ad expense. It wasn’t focused on storytelling given the limited talent/budget of the founder. It also wasn’t even video. And this is the reef on which most failed campaigns and canceled agency contracts crash.

 

Now, agencies like his will often point quickly to the low campaign budget that they a) said was OK originally and b) now point out the inadequate size.

 

Look, creative does matter but not when other fundamentals are lacking. In fact, great creative chasing a mediocre product experience is one route to negative ROAS for CPG brands selling mostly in retail.

 

This founder was patient, though, and wanted to persist for the sake of at least building local awareness. He funneled the admittedly small budget into just one large North American city. Spread out monthly over a year. This at least made sense given his lack of resources and the brand’s distribution being limited to the same city. And, despite what I’m about to share, the reach was actually pretty strong for that small of a budget, priming, at least, he thought, the local market.

 

And maybe it would have had more of an effect if something else, something very measurable, wasn’t also true.

 

What am I referring to? Well, the second reason the campaign didn’t achieve much was a factor most founders overlook when they calculate ROAS.

 

ROAS in fast-moving consumer goods is a tricky little demon. If you calculate ROAS based on how people try your product based on seeing the ad content within a near-term window of time, you will be hunting for a spike in sales during the first month of ads, much like a spike in a temporary price reduction. And you may see it too. In measuring this spike, my client found out that the unit lift in a non-promoted period at his key retailer amounted to less than half of his monthly ad spend in that city. It was clearly a negative ROAS campaign from a pure sales generation perspective. And when you’re cash-strapped early stage, you really do have to justify ads like that for the sake of your own PNL and survival.

 

Since the brand was new, hard to find in-store, and high-priced, this scenario isn’t uncommon at all when it comes to paid social media focused primarily on awareness-building for a retail distributed brand.

 

But, the founder actually calculated the ROAS incorrectly in his disappointment. The problem was something more fundamental that we didn’t find out until much later. And looking back on it, he should have known this calculation BEFORE he invested, really anything in ad spend, especially for a retail CPG brand where there’s a lag time between seeing the ad and seeing it again in store in which many ad impressions get forgotten.

 

Anyone who runs a DTC channel or DTC brand knows what I’m about to say. Lifetime value. LTV is what the founder wasn’t looking into or even guesstimating because it’s not completely straightforward in a CPG business. Moreover, his business was just too new. You can’t measure the lifetime value of something that launched a month ago. And he had decided to advertise on social right out of the gate before understanding what this little LTV number might be.

 

Customer lifetime value in consumer packaged goods isn’t really a thing because most CPG companies don’t actually calculate it. But there is a way to calculate it. And it is about estimating the long-term value of repeat purchasers combined with the revenue of non-repeating one-time triers who, let’s be honest, are often up to 50% or more of the people who try you on an annual basis. In other words, they reject you. Sorry. Customer lifetime value is actually something you can statistically model, as we know, for Amazon and DTC businesses because you have daily, sometimes even hourly data on repeat purchasing customers and their purchasing patterns.

 

Now in CPG, you ideally want around 20-30% of your annual customers generating 80% of your annual revenue through repeated, sustained purchasing of multiple units every month or week. And this is very possible. It’s as possible for Lay’s as it is for you if you have the right thing that has a real market positioning with hope. It’s the magic behind Skate Ramp brands. It’s not a common thing for early-stage brands, though, as I mention in my book. Because most of them are sub-optimally designed. The more you spray your brand too quickly into too many doors without doing the time-consuming cultural work of building awareness and enthusiasm ahead of distribution, the more the brand will ‘grow’ based mostly on one-time trial AND adding doors.

 

If you’re going to think through paid advertising for your brand, you have to first collect some data on your repeat purchase pattern.

 

And here’s the rub: Don’t do ANY paid advertising until you’ve figured this out, please. And if it takes you three years, so be it.

 

For the anonymous founder in my sad little case, his repeat purchase rate on an annual basis was 11%. This was discovered through loyalty card data which he begged out of the buyer. Also something I highly recommend you pursue at the end of your first year. This means that 89% of people, on average, bought one bag, said nope. Yikes. Ouch. That’s pretty much the same as the average doomed line extension at a public food/beverage company. All this, despite his steady paid monthly media campaign on social platforms with the admittedly small budget.

 

Without repeat purchase, there is no financial efficiency in creating a new customer. You are paying $5-8 to get their attention, to get a click, to a store locator, which is the best thing you could do with that attention, with that initial purchase. And in most early-stage CPG companies, folks, that are especially in food and beverage, that’s is 2-3x your gross profit per unit. So it’s a money loser to pay for advertising that doesn’t generate enough sustained, habitual repeat purchasing to fund the bloody advertising.

 

When you do the math, folks, it’s in the habitual repeat buyers, the real fans, created off each campaign that make the entire expense worth it. It shouldn’t be a one-time trial. 1*X units is far less than 50*(X/10)…in fact, it’s five times less. Do I have your attention now, listeners? For the math-challenged, you may want to rewind this and listen to that formula again. And it’s not too far off the mark.

 

Despite this theoretical return on a strong, habitual repeat-driven brand, the latest research indicates that paid social simply doesn’t make sense for mostly offline CPG brands selling in brick retail in their early years. Why? Because you don’t yet have the awareness, the passion, the word of mouth flow. The product is often not optimized, AND multi-packs aren’t on-shelf right next to the trial size packs allowing fans to easily upgrade and load their pantries. However, paid social or paid Amazon ads can work very early on for Amazon and DTC sales and have become almost a science known as performance marketing. By removing the time lag between ad viewing and purchasing, online ads for online buying is wildly frictionless and can tap into emotional impulse, which is almost impossible to explain.

 

But here’s that pesky issue again. You have to sustain repeat purchasing to really get your ad money back at 5 dollars a click or more if you’re in some horrendous over-bidded environment. Two purchases from 20% of your initial buyers are also not likely to make your money back. Though you might get close.

 

If you can measure your monthly repeat purchase rate (loyalty card data from willing retailers is the way to go here) and then quantify the annual value of these consumers before you pay for social advertising, you have the first component necessary to calculate real ROAS and to determine if a significant campaign expense is actually going to be worth it. And it’s going to need to be more than 30,000 bucks, folks, in a year. These are the heavy users. Once you have that number, you can calculate the value of one-time trial lift during your advertising campaign. The is the second component of the math you need. Any paid campaign should happen when there is no temporary price reduction, paid display, or other promotional tools in use.

 

With this lift calculation and the LTV calculation based on your monthly repeat purchase rate, you can run a LTV value of the repeaters based on the existing pattern in the business. This number should pay for your advertising costs within a reasonable period of time (i.e., 6-9 months) for the campaign to be deemed a ‘success.’ Betting on over a year of repeat purchases to pay for your ad campaign is a tactic for highly funded VC-backed brands.

 

If you sample out of store, you can use the same basic approach, except the ‘advertising spend’ simply becomes your all-in cost-to-sample. Sampling generally generates higher conversion rates which means an absolutely higher number of repeat purchasers for the same amount of promotional money.

 

My anecdotal work with clients on these mechanics suggests again and again that paid campaigns of ANY kind only generate ROAS in retail CPG when a) repeat is very high and b) consumers habituate to consumption and c) multi-packs are available in retail if the brand emerged there.

 

That’s all I got on this thorny topic. Don’t jump into paid ads, folks, especially on social, until you know your repeat purchase dynamics and long-term usage patterns. It’s a game for eight-figure brands, really. Or pure-play online brands.

 

As always

 

Be safe out there.