Two metrics ... ROAS and CAC ... are quite popular in digital marketing, and for good reason ... each metric is easy to calculate. Furthermore, each metric essentially measures the same thing.
ROAS = Return on Ad Spend. If you generate $1,000 in sales and you spend $500 to generate the sales, ROAS = $1,000 / $500 = 2.00.
Now let's assume that the AOV is $100. This means you generated $1,000 / $100 = 10 customers.
If all of those customers are new (and they generally aren't new), your CAC or "Customer Acquisition Cost" is $500 / 10 = $50.00.
So now you have a lot of metrics, but you don't have a lot of intelligence. That's a bad combination.
We're one metric away from having something useful.
If you know your "Profit Factor" ... the percentage of sales that flow-through to profit prior to fixed costs, we have something useful. This allows us to convert ROAS and CAC to a more meaningful metric ... "Profit per Order".
- Total Demand/Sales = $1,000.
- Ad Spend = $500.
- ROAS = $2.00.
- CAC = $50.00.
- Profit Factor = 40%.
- AOV = $100.
- Customers = 10.
- PPO (Profit per Order) = ($1,000*0.40 - $500) / 10 = ($20.00).
- Law of Diminishing Returns in Marketing Spend.
- Ratio of PPO to CLV.
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