All brands need to scale at one point or another, more often than not to increase its profits, market share, and competitiveness, as well as to meet the growing demand for their products or services.
Most business executives with experience in scaling aim for 3x BROAS as a sustainable baseline, as they can (usually) exist at 3x in a fairly healthy and sustainable way. It’s at least a good starting point and serves as a proof-of-concept that your business can successfully advertise online and make money at it.
The goal is almost always to increase BROAS beyond 3x as brand awareness grows (and you get more organic business, which is less expensive in the long run), typically toward 5x in many e-commerce scenarios, though this can fluctuate widely.
Businesses keen to scale quickly usually have to forfeit 3x in the short term because they’re dumping a bunch of money into getting new customers and growing awareness.
We usually recommend 3x if we have no detailed information about a business, but here’s an exercise that will help you figure out what your goal BROAS should be:
AOV = Your average order value
Avg. Overhead Cost Per Order = (Your Total Business Overhead Minus Ad Spend) / (Projected Number of Orders)
Goal Profit Per Order = What you need to reach your business goals
i.e., do you need to make a profit this year? Your Goal Profit Per Order should equal your overall profit projection divided by your projected number of orders.
i.e., do you just need to break even? Your Goal Profit Per Order = $0.
i.e., do you have capital that can be spent on acquiring customers at a loss, with the goal of growing brand awareness? In this second scenario, your goal profit would be a negative number. For example, we are ok with taking a $10 loss on each new customer we acquire for the next year (aka a Goal Profit Per Order of -$10).
Goal Customer Acquisition Cost (CAC) = AOV – Avg. Overhead Cost Per Order – Goal Profit Per Order
Minimum BROAS = AOV / CAC
E.g. Min. BROAS = ($310) / ($310 – $100 – $100) = ($310) / ($110) = 2.8x
In the example above, we need to hit 2.8x BROAS while aiming for whatever revenue goal you lay out (the CAC = $110). You’ll want to input your numbers and ensure that the BROAS threshold aligns with your projections.
We encourage our clients to do this exercise twice: Once with Goal Profit Per Order = their ideal number, and again with Goal Profit Per Order = what you can live with. We start by getting you to “what you can live with,” and then optimize toward the ideal.
If the goal is to generate more orders (i.e., a higher volume of customers), you don’t want to limit yourself by insisting that each of those customers generates a killer profit on their first transaction.
If you have any questions about implementing the above formula, or if you are interested in learning more about having BK assist in these efforts, contact us today!
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