When you’re trying to make advertising work, there’s a simple calculation you can use to get a rough idea on how much you can spend per click.
Multiply your purchase conversion rate by the first order’s average value (AOV) and your margin.
3% conversion rate X $50 AOV X 20% margin = $0.30 cost per click
The result is how much you could spend per click in order to ensure that you’ll make enough sales to cover the costs on the first order.
By using the first order’s AOV you’re also ensuring that you’ll make back the costs right away. If you used your overall AOV or customer lifetime value, then you’d have to wait for that customer to go through their entire lifecycle of purchases.
(That’s why some advertising formulas that use lifetime value will use a percentage, they’re accounting for how long it takes to earn the full value)
Using a simple formula like this should let you quickly see if advertising could work for you or if you’d be better off focusing on a different marketing channel.
If you don’t know your first order AOV yet, you can try coerce the data out of Shopify’s reports (though you might need a higher-end Shopify plan).
Or you can install Repeat Customer Insights and check its Customer Purchase Latency report. It includes the AOV of your first orders (and every order after that).
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