What kind of a payback period should paid acquisition target?

When running paid acquisition campaigns like Google Ads, you should be targeting a payback period. That means, on average a customer has paid back their acquisition costs by a certain point of time.

Basically you want to know at what point a customer has produced enough profit to pay for the advertising that attracted them. If you pay $50 to acquire a customer and they place two orders over 60 days for $25 profit each 60 days apart, you have a 60 day payback period.

In other words, you spend $50 today, get $25 now-ish on the first order, $25 in 60 days, and then anything else is actual profit.

Having a short payback period is ideal. 0 is the best, where they generate more profit in their first order than your costs. But that's getting more difficult as advertising costs increase.

A good target is under 30 days. If you can make back your costs in a month, there's a good chance you'll have enough buffers in place between your advertising account, advertising invoice, and bank account. Longer than 30 days and you'll need extra cash to cover the costs while you wait for the customer to order again (you're floating the capital).

Using the example above, the company would get $25 back right away but since they spent $50 to acquire the customer they are showing a $25 loss so far. They'd have to have cash to pay their advertising bill this month and then at the end of next month that customer will create the second $25 order, paying back the advertising expense.

Without cash on hand, that company might need to take out a loan, stop advertising next month, or cover the expense somehow.

No big deal for an extra $25 expense but what if the store needs 100 customers per month? That's $2,500 to float this month. Keep running ads and now it's another month stacked up before the first month if paid back ($5,000 loss).

Need 1,000 customers? Add a 0 to that loss.

Scaling with paid acquisition is hard.

Aim for the shortest payback period you can. Again, under 30 days is best. Close to 0 is great. Under 0 and you broke the laws of physics and now have a money-printing machine (care to license the tech?)

ROAS (Return on Advertising Spend) measures something similar, but it only looks at the gross revenue. Not your cost of goods, overhead, etc. It's almost always a rosier picture and doesn't look at the business as a whole, only the marketing department.

ROMI (Return on Marketing Investment) is a better measurement, but make sure you use the profit based one (Net Profit divided by Marketing Spend). I've seen people state ROMI as the same formula as ROAS which misses the point of ROMI entirely.

Analyzing your customers by their first channel (e.g. Online store VS Facebook, etc) will help you spot channels that attract better customers. You know the ones. Those who buy more, buy sooner, and come back.

Repeat Customer Insights will automatically segment your Shopify data based on the acquisition source so you can find these high-performing channels (and help decide to drop the duds).

Eric Davis

Leaky funnel losing repeat customers?

Are you struggling to grow your repeat purchases? Install Repeat Customer Insights to equip your store with the insights it needs to increase your repeat sales.

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Topics: Advertising Customer acquisition Profit Roas Romi

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