In today’s episode of the podcast, I talk about what a good ad budget and cost per customer acquisition look like. I got this question from my last Facebook Live, so if you have a question, tag me on social!
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What's up everybody. Anton Kraly here from eCommerceLifestyle.com, and welcome back to the podcast. So for everybody that's new to the show eCommerce Lifestyle, just know that this specific show is designed to help store owners to increase their revenue, automate their operations, and become number one in their niche. So if you are listening right now or you're watching and you don't have an online business yet, that's totally fine. I'm sure you can get some takeaways to use eventually. But what I would recommend for all of you that are just getting started that are looking to go from zero to one, from no business to profitable business, all of you guys should go check out DropShipWebinar.com. I'll post the link in the description. Again, it's DropShipWebinar.com. That's where I host a two and a half hour free training for my company, Drop Ship Lifestyle, that shows you how to build a highly profitable semi-automated store, literally starting from nothing.
So with that being said, let's go ahead and get into today's episode of the podcast, which is actually the second episode on the new format. And I discussed this and kind of why we're switching this up in the last episode. So if you haven't heard that you might want to go back and check it out. But what we're doing now is taking questions specifically that are asked from people that are in our community. So the question that I'm going to be answering today, let me pull it up, came in from Mark Bryce. And this is a question that came in during a live stream that I hosted, I think on Monday. And his question was, "Is there a metric you use to determine budget for ads? What is an average cost per acquisition for a $50 product compared to a thousand dollar product?"
So that is, it's really two questions. I'm going to answer both. It's a great question. I'm going to say for supplemental resources, even as I'm answering this, check the description because I'm going to include a link to a YouTube video I made called ... I think it's called Here's How Much You Should Spend on Facebook Ads. But that'll be linked below, and that goes like a deeper into different phases of advertising and how budgets change over time and how as you spend more, you kind of have to mess with some other things in your ad campaigns in the three different phases. Again, you can check that out for more information. But to answer the first part of this question, is there a metric you use to determine budget for ads? Yes there is. So when we're building stores, what we always aim for at a minimum ... So we always have these minimums in our businesses. Like if it's not there, then there's a problem for us.
We want a minimum blended return on ad spend of 10X. So you might've heard return on ad spend before, R-O-A-S, ROAS. That is how much money you get back for every dollar you put into ads. So let's just say I put it in a dollar. In our situation, I want at least 10 back. But remember, this is blended. So that's overall between our Facebook remarketing ads and our Google Shopping ads and our YouTube ads and our Google display network ads and our Bing ads and our Pinterest ads. All together, I want to be able to maintain a 10X return on ad spend month over month blended. Now, as far as how to determine how much money it should be going in, like what should the ad budget be ... Again, I've done different videos on this in the past. I train people on this in my course, Drop Ship Lifestyle. But the way that I look at it is a little bit different. I look at what I want our revenues to be and then I work backwards off that.
So I'll give you two different examples. Let's just say you were building a brand new store. You're starting day one and you're like, "You know what? My store ..." Let's say the first month, you do the work, you build your website, you upload suppliers, you optimize for conversions. And now month two you're ready for traffic, you're ready for sales. And you say, "Okay, my first month that this store is actually functional and operational, I want to do $10,000 in sales." Okay. So what I just say, we want at least a 10X return on ad spend. So my advice to you would be work backwards off that 10K and say, "I'm willing to spend up to a thousand dollars this month to get the $10,000 in sales." So that's how we figure out ad budgets.
Let's say a few months goes by. Maybe month two you up your budget, you spend 2000. Maybe you do 25,000 in sales. Maybe month three your budget is 3,000 in ads and you do maybe 32,000,, whatever in sales, right? So you're still doing good. Numbers are going up. And then let's just say you get to a point where you're like, "Okay, let's really grow this thing." And the goal would be, as the next big step, you're spending $10,000 a month in ad costs and you're doing more than a hundred thousand dollars a month in ad costs. Because remember, that 10X return on ad spend is a minimum.
So the way that we determine ad budget is based on how much money we're looking to do in sales, and that 10X remember, is a minimum. There are situations, normally earlier on as your ad budgets are lower, where your return on ad spend could be well above 10. So don't think that's perfect, right? Because again, as you're spending smaller and smaller amounts, even into the thousands and thousands of dollars a month in ads, you should be able to beat 10X return on ad spend every month over and over and over. So yeah, that's how we determine budget for ads.
One more tip I'll give you on that for where the money goes, when you're first starting out, I recommend taking 90% of your ad budget, whatever that may be. Let's just say again, it's a thousand dollars for a month. Take 90% of it. So in that case, 900. Put that all into Google Shopping ads, to Google product listing ads, and then take 10%, the remaining 10%, in that case a hundred dollars, and put that into Google dynamic remarketing ads. So for all the people that are coming to you from Google that don't buy, when they go on Facebook, they'll see your remarketing ads and that'll be 10% of your budget.
Now, to answer the second question in this question, it said, "What is an average cost per acquisition for a $50 product compared to a hundred dollar product?" I'm sorry, a thousand dollar product, so 50 compared to a thousand. So I'm sure if you had all the data from every eCommerce store in the world, you could find an actual average. I don't think that's possible, but what I'd say is we, no matter what kind of price range we're in, I'm always willing to work off that 10X rule.
So if I'm selling a ... Let's just go to this example, right? Okay. Again, let's say my goal was a hundred thousand dollars in sales in the month, then I tell myself, "Okay, I'm willing to spend up to $10,000 on ads to get that 100K in sales, 10X return on ad spend. Well, if my product's selling for a thousand dollars, then I only need to sell a hundred of them per month to reach my a 100K goal, and with my $10,000 budget, I can spend up to $100 per acquisition. So with the thousand dollar product example, if my goal was a hundred thousand in sales for a month and I had that 10% return on ad spend goal, then I could spend up to a hundred dollars per acquisition.
Again, the goal is lower and it will be lower when you're first getting started, assuming you set up your ads correctly. But that's at scale. So as you scale up, you want to be able to maintain that 10X return on ad spend. And the way I think about it is, let's just say in the beginning you're selling thousand-dollar products and you can acquire customers for a $60 CPA. Okay, great. But you're limited because you might be maxing out your budget every day, every week, every month. So then you bump up your budget a little bit more and now you're getting more traffic, more sales, but they cost you a little bit more to acquire, but you're making more at the end of the day because you have more sales, more revenue, more profit, so it's worth that higher CPA. And that's kind of the game, right?
We'll keep bumping it up, bumping it up, bumping it up until we just dominate ads for that product, until we get what we can assume are all the sales from Google and until our return on ad spend isn't 10X anymore. So keep that in mind. Now let's look at this the other way for that ... What was it? You said $50 product example. And let's just say we had that same goal. You wanted to have a hundred thousand dollars in sales for a month. You were willing to accept a 10X return on ad spend. Well, at $50 products divided by your a hundred thousand dollars sales goal, that would mean you have to sell 2,000 units. So 2,000 products in a month at $50. Now, when you look at how much budget you have to acquire customers there, take your $10,000 ad budget for that month, divide that by the 2,000 orders that you need in that month at $50 each. And what you're left with is a $5 CPA. So you can spend $5 to acquire a customer.
Now, I'm not going to say that's impossible because I know there's ways to make it work, but I'll tell you right now, it's a lot easier to acquire customers when your budget is a hundred dollars per acquisition as opposed to $5 per acquisition. And I mean that's really one of the main reasons that I don't like selling inexpensive products. Not to mention I just don't want 2,000 customers a month. It's a lot of work and back and forth and communication it's not a lifestyle business for the most part. I mean, you need to scale a lot bigger than that if you really want to make money, a lot more than 2,000 sales a month of a $50 product.
But yeah, just keep that in mind. Those are kind of the numbers. Again, 10X return on ad spend is the goal. Budget is dependent on how much money we want to do in sales in a given month. That's how we determine that. We work backwards. And finally, I'll say for everybody that might comment or email in being like, "Oh you can run ads $50 products profitably. There's a ton of them." Yes, that's true. But there's a few different things about that business model that you need to be aware of. One of them is for the companies that really blast off and are actually acquiring customers profitably, from day one, for that small price, and again making profit on that first sale, those are usually the companies that have the virality, things that take off. So Squatty Potty. Okay. I think it's like ... I don't know what it is. It might be 40, 50 bucks. But that's a product where the ad was just so viral.
It got tons of organic shares, people tagging each other, liking it, posting it on their Facebook, sharing the YouTube link. So even though they were spending money for ads, that blended return on ad spend came down to like nothing, and they did I think over 50 million in sales their first year. So yeah, so that could work. Another thing that you really need to be aware of, which is more of a reality for most people that are selling low-priced products, again around 50 bucks, is that their money isn't made on that first sale. Because let's just say, even if you maintained five, that would be amazing. If you can run ads profitably and acquire cold traffic to become customers for five bucks all day, you should have a trophy if you can maintain that in the longterm.
But what most of these people are doing are spending money and losing money on the first sale and then their goal is to have the repeat purchase there. Their goal is to have some type of either continuity or campaign that gets that one customer to buy over and over and over again so they can make money maybe three months out, six months out, a year out. Some companies go even longer. For us, again, the goal is to acquire customers profitably from the beginning. And one of the reasons we're able to do that is because we have big budgets that we could spend, again in that thousand dollar example, up to a hundred dollars in ads to get that sale and still maintain 25%-plus net profit. So I hope you found that helpful. And guys, in general, if you like this format of episode, kind of the more informal Q&A,definitely let me know.
And I mentioned this in the last episode, but if you have any questions for me, go to eCommerceLifestyle.com. Click on contact and you can submit a question through there. And also while you're on the website, we have almost 200 episodes now with all of the transcripts, show notes, videos if applicable, all on eCommerceLifestyle.com as well. So definitely check that out. So that being said, guys, thank you for tuning in. Hope you got value. If you did, please help us by leaving a review on Apple Podcasts. It means a lot. It helps the show get out there. And with that being said, guys, I will talk to you in the next episode.
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