How much money is too much on ecommerce advertising?
Running Google, Meta, Tik Tok etc Ad accounts to promote your ecommerce business is like having kids who want pocket money. They always want more with the promise of great things/behavior.
But when is enough enough? How much is too much, and how much is too little?
As an eCommerce coach, I help Aussie eCommerce brands solve this problem all the time.
Here’s how.
Step 1. Ignore/debate fiercely with anyone who stands to gain personally from increasing ad spending
For example, if someone running your ads charges you a % of the ad spend, no matter their best intentions if push comes to shove, they tell you to increase, as they will get more. They have an inbuilt bias.
Google and Meta stand to gain if you increase advertising spend.
Sometimes it’s the right thing to do, but many times it isn’t. Ask how increasing spending helps your business. If the answer isn’t convincing, then it hasn’t been thought out.
Step 2. Set a range of spend based on a percentage of revenue
In marketing geek land, this is called Marketing Efficiency Ratio (MER). It is a percentage of your net revenue (GST taken of total sales). For example, your MER might be 15%.
Example…
Monthly revenue is $110,000
Remove GST (net revenue) $100,000
15% of Net Revenue $15,000
Step 3. How to set your MER
It’s different for each business, as each one is unique. But that’s the marketer in me saying “depends” which is annoying, so let’s give an example.
If the cost of all your product and getting it to a customer is 50% of your revenue (minus GST, garrrrh GST) and all your other expenses are 30% (accountants call it Opex) and needs to be all other costs (including rent wages and that fancy pen from the stationary cupboard) you’re left with a 20% Net profit. Which is good.
Your MER comes out of Expenses, that’s the 30% bit. So if you spend 15% on marketing, you only have 15% left to pay bills or make less profit.
A rough rule of thumb for those that don’t want to fire up Xero or walk down to accounts because of that “incident” at the Christmas Party, go 8% if the company is a a good size and wants to maximise profit. Go 15% if you need to grow and retain some profit and 20% if you want to really push and make little profit.
Step 4. Find out your MER
Check what percentage of revenue you’re spending on marketing now. It might shock you.
Declaration: I am not your accountant or a licensed Financial Planner, and this is information is just for entertainment purposes or for you to read on that slow Friday arvo so you look busy ; )
Iain Calvert
Ecommerce Consultant & Trainer
Boom Aussie eCommerce Training
Iain (aka “ian”, that double “I” throws a lot of people) is an Australian based eCommerce consultant and trainer that has worked with the likes of Billabong, Vogue, Quiksilver and 100’s others under NDAs. He applies what he learned working for big eCommerce businesses to help independent Aussies businesses sell online.
Originally growing up in the UK he started in eCommerce in 2003. He moved to Brisbane in 2011 to join, and eventually end up running, one of the largest independent digital and eCommerce marketing agencies in Australia.
He now lives in Melbourne, where he works as an Ecommerce Consultant for a select handful of Aussie brands helping them sell successfully online.
Iain’s definition of eCommerce success is having more money in the bank at the end of the month, rather than ridiculous headline-grabbing quotes like “XYZ now worth $100m”. After working with and seeing the inside of these fast-growing companies he came to learn they aren’t all they seem. He believes that popular doesn’t mean profitable and applies this to eCommerce.
Due to restricting the no. of clients in his eCommerce consulting practice, and repeatedly being asked to help other Aussie eCommerce businesses, he setup up Boom – Aussie Ecommerce Training to document what he knows and share it with fellow Aussies or anyone with an interest in selling in Australia.
He can be easily contacted on Linkedin, where he also regularly shares free eCommerce tips.