Wondering if you your big Q4 goals are possible? Ready to do ads, but not sure if your eCommerce business can afford them?
In today’s episode we’re covering important calculations that will show you how much traffic you need to hit your sales goals and how much you’ll need to spend on Facebook ads.
Before we can figure out how much it’s going to cost us in Facebook Ads to hit our sales goals, we need to get clear on what those sales goals are and how much we want to generate through Facebook Ads.
We’ll calculate our overall traffic needs and then we’ll look at the needed budget for both conversion and lead generation ads based on averages and numbers provided by our resident Facebook Ads Strategist, Nicole Diedrich of Diedrich Marketing Strategies.
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How to Calculate How Much Traffic You Need to Reach Your Sales Goals
First, we’ll need these numbers:
Gross Profit or Revenue Goal
Gross Margin %
Average Order Value
Website Conversion Rate
Now we’re not going to go into all the details on these eCommerce KPIs or how to improve them today, check out episode 93 for more details on that, but know that these are levers in your eCommerce business that you can pull to increase your results.
What we’re going to do is assume all your KPIs are the same and just figure out how much qualified traffic you need to hit those goals.
And here are the numbers we’re going to use for this calculation:
- $180k gross profit goal
- 60% gross margin
- $62.50 Average Order Value
- 2% conversion Rate
I’m doing to do this calculation based on a yearly goal, but you can do this same for any period of time in your business, like Q4 for instance.
So maybe you have a yearly goal and you know you’re 75% of the way there. You can do these calculations for the remaining 25% for October through December.
Convert Your Gross Profit Goal into a Revenue Goal
First, we’ll convert that gross profit goal into a revenue goal. Divide your gross profit goal by your gross margin percent. $180k / 60% = 300k
How Many Orders Do You Need to Hit Your Revenue Goal
Then, we’ll figure out how many orders we need. Divide your revenue goal by your average order value.
300k/62.50 = 4800 orders
Calculate How Much Traffic You Need to Hit Your Yearly Revenue Goal
Now, in order to figure out how much traffic we’ll need, we take the number of orders and divide it by our website conversion.
4800/2% = 240k
Calculate How Much Monthly Traffic You Need to Hit Your Revenue Goal
And since we’re talking over a year period, we’ll divide 240k by 12 to get 20k
So, we need 20k qualified website visitors to hit our $180k profit goal.
How Much Do You Have to Spend on Ads to Hit Your Revenue Goals
Next up, let’s figure out how many advertising dollars we need to spend to hit those goals. And we’re going to look at this in two ways, with lead generation ads and conversion ads.
Now, admittedly, this might get a little hard to follow on the podcast, I’m gonna do my best. But remember we have a video training we did that even includes slides where you can see this. Check the show notes for a link to that training.
Decide How Much Revenue You Want to Drive Through Facebook Ads
First, we need to decide how much of our total revenue goal of $300k do we want to come from ads. Based on Nicole’s recommendation and what she usually sees with her clients, we’re gonna go with 15%.
So, 15% of our $300k goal, $45k dollars is going to come from ads. How much do we need to spend, to expect those results?
What KPIs You’ll Need to Calculate How Much You Need to Spend on Facebook Ads
First, we’ll need to know a few specific ad KPIs
Click through rate, cost per click, cost per lead and conversion rate.
For this exercise we’re going to assume the following numbers. These are averages based on Nicole's clients.
- CTR – 3%
- CPC – .50-1.5
- CPL – $1.5-$7.50
- Conversion on Lead Generation Ads: 15-40%
- Conversion on Conversions Ads: Typically 1-2% more than your regular site conversion, so we’ll use a range of 2-5%
Our goal, is to generate $45k in total revenue from our ads.
How Many Orders Do You Need From Ads to Hit Your Revenue Goal
Let’s figure out how many orders we need to get from ads, assuming we have the same AOV of $62.50
So we’ll take $45k/$62.50 which gives us 720 orders
Now we can break it down over the different AD types, lead generation and conversion ads.
Calculate the Required Ad Budget for Lead Generation Ads
We’ll start with our lead generation ads. We can expect these to convert at about 15-40% over a 90-day period.
We know we need 720 orders, we’ve already done that calculation.
How Many Leads Do We Need to Hit Our Required Number of Orders
But now we need to calculate how many leads do we need to get those 720 orders?
So we’ll take our # of orders needed and divide it by our conversion rate.
720/15% = 4800
720/40% = 1800
So we’ll need anywhere from 1800 to 4800 leads, who convert at 15-40%, to hit our goal of 700 orders.
What Will it Cost to Get the Leads We Need?
Now, you’ll take the total number of leads needed and multiply that by our CPL, or cost per lead. In this case we’re using a range of 1.5-7.50
So, take 1800 x 1.5 = $2700, that’s the low end of the range.
And then we’ll take 4800 x 7.50 = $36000 that’s the top end of the range.
So, with lead generation ads, to generate $45k in sales from ads, with the KPIs we used for this example, we would have to spend anywhere from $2700 – $30,000.
Yes, it’s a big range. But there are a lot of variables that go into those ad KPIs, so we wanted to show you what that would look like.
Calculate the Required Ad Budget for Conversion Ads
For conversion ads, first we’re going to look at how many website visitors we need to get the number of orders we need. We’ll start at the low end of the conversion rate range of 2%.
How Many Website Visitors Do We Need from Conversion Ads
720/2% = 36,000 website visitors
At the high-end of the conversion rate range, it’s
720/5% = 14,400 website visitors
What Will it Cost to Get the Website Visitors We Need from Conversion Ads
When it comes to getting traffic from conversion ads, we’re essentially talking about clicks. And the average CPC for conversion ads, is .50 – 1.50. So we multiply the traffic we need by our cost per click to get our estimated ad spend.
If you’re at the 2% conversion range you need 36,000 ad clicks or website visitors.
36,000 x .50 = $18000
36,000 x 1.50 = $54000
If you’re a the 5% conversion range, you need 14,400 ad clicks or website visitors.
14,400 x .50 = $7200
14,400 x 1.50 = $21,600
So for conversion ads, your ad spend to generate $45k in revenue could cost you anywhere from $7200 to $54k.
Yes, that’s also a big range, but there are a lot of variables in there. And if you’ve done your own conversion ads before, you can absolutely plug in your own numbers. My goal here is to just show you how the math works so you can apply it to your biz.
Can Your eCommerce Business Afford Facebook Ads?
Now that we’ve done the math and you’re seeing how some of these numbers are shaking out, you might be noticing that some of the required spend that’s being calculated, based on the placeholder numbers we’re using, are more than the total revenue we’re trying to drive.
So for instance, on these conversion ads. When we assumed that we were paying $1.50 per click and those clicks would convert at 2%. In order to hit our revenue goal of $45k we would have to spend around $54k. Well… the math ain’t mathin’ on that, as they say. Where did I first hear that? I think it was a reel… and now I say that in my head all the time.
And it’s especially scary to look at when we remember that $45k in revenue doesn’t mean we actually made $45k because we have our costs of goods sold to consider.
Let’s do that math first. Our gross margin % is 60, so 45k x 60% = $27000
So that means, for every $45k we make in revenue we have $27k in gross profit.
But the range on our conversion ads was 7200 – 54k. We could end up losing money on these conversion ads if our KPIs aren’t right.
So what about our lead gen ads. Let’s go back to those for a sec. With our lead generation ads we estimated our ad costs could be anywhere from $2700 – $30,000. It’s still possible we could spend more on ads than our gross profit, but the discrepancy isn’t quite as big.
How Can You Lower Your Budget for Facebook Ads
What’s the moral of this story? That eCommerce and ads are a numbers game. That every individual KPI is going to influence your ultimate results. And this is not to scare you. It’s to empower you. It’s to show you that looking at your numbers and using the data that is in front of you can help you make smart decisions, avoid costly mistakes and see what’s truly possible for you.
I know this was a lot to just listen to. Remember, you can go to eCommercebadassery.com/161 to see the show notes for this episode and a written out blog post, which should be easier to follow. We also have the video training available which I’ll link to in the show notes as well.
And remember, that traffic is just ONE lever you have to pull. Adjust the numbers of your other KPIs to see how that can bring down your overall traffic needs and ad spend. And then focus on improving one KPI at a time to lower those costs.
And one more thing before we go is being in the red on your ads, always a bad thing, not necessarily. It depends on your business.
Understanding Lifetime Value + How Much You Can Spend on Facebook Ads
Now, one of the things we didn't really get into today is understanding customer lifetime value. Let's just get into it. Let's talk about it. So over the time that a customer is with you as a loyal customer and comes back and makes repeat purchases, right? They are worth more than that initial purchase that they make with.
So if you know that a customer is gonna spend $500, a thousand dollars with you over the lifetime of being your customer, are you okay spending a little money in the beginning to acquire them? This is gonna be different for everyone. It's going to depend so much on your product, your business, and what you're trying to create.
What stage of business are you? but typically if you have a consumable product or a natural repeat business, and you're in the growth stage, spending a little more on ads as compared to the revenue that you get is not always a bad thing. Now, I'm not saying just like go in the red and you know, totally screw yourself over.
That's not what I'm saying, but. if there's, you know, just a small little difference. I want you to just think about the long-term of those customers, right? This is not necessarily just a one-and-done. And so I don't want that to deter you from even trying, because you just don't know what might happen. of course.
I also don't recommend that you make decisions like this on your own, if you're not 110% comfortable with the numbers. So if that's the case, reach out to me, reach out to Nicole and we can kind of help you figure out what the right direction for you is. I hope that this was helpful. I hope that, you know, talking about all these numbers and doing these calculations on the podcast, get you more comfortable with.
and dare I say, eventually get excited about understanding them and making decisions from them. A girl can dream, right? As we go into Q4, remember that the more specific you can be with your goals, the more you can nail down these numbers, the easier it will be for you to reverse engineer your success.