One of the most common misunderstandings I hear as a paid media manager centers on scaling up ad spend. Brands often come to me wanting to double or triple their upfront spend, and they expect a proportional increase in sales.
Unfortunately, it rarely works this way. When you increase your ad spend, at a certain point, you will usually see some deterioration in your return on investment.
Say you’re a brand that spends $100 per day on ads, and you tend to receive an advertising cost of sales (ACoS) of 20%. If you decide to increase your ad budget to $200/day instead, you should expect your ACoS to increase.
Note: ACoS is the default metric for brands selling on Amazon. It is essentially the reverse calculation of ROAS (return on ad spend). But the same principles of this thesis applies to advertising outside of Amazon too: ROAS generally deteriorates (at least temporarily) as you scale up ad spend.
Why does this happen?
To take that $100/day example: chances are you’ve already maximized the percentage of customers you can convert on your baseline ad spend. You know the perfect keywords to target and the best times of day to bid on ads.
That is especially true if you’re already highly ranked on Amazon. I recently worked with the non-alcoholic spirits brand Ritual Zero Proof, which wanted to double its ad spend on Amazon. Ritual Zero Proof was already performing extremely well—at the time, it was #10 in its category.
Certainly, the brand had room left to grow, but at these upper echelons of Amazon, it becomes more expensive to convert new customers. At least initially, I told them to expect their ACoS to increase (e.g. become worse).
As you increase your ad spend, you are going to need to allocate some of that budget toward new types of ads. In order to spend your extra budget, you’re going to need to try:
New times of day. You’ll be bidding on ads during more times of the day. Inevitably, some of those time slots are going to be high competition, and you might end up spending more of your budget.
New keywords. As you scale your ad spend, eventually you’re going to need to try some new keywords. That will often mean placing ads on keyword searches that don’t convert as easily for you. For instance, at some point, you’re going to have to move your new ad spending away from specific searches for your specific brand and toward searches in your larger category, such as “snacks.”
Attacking new keywords is a smart play from a long-term growth standpoint, but they also mean a lower return per ad dollar spent. Your ACoS will almost certainly get worse in the short term.
New parts of the funnel. Say your current ACoS numbers come from running ads to the customers who know you best—either returning customers or new customers who already have visited your website. These are the cheapest customers to convert. But as you increase your ad spend, you’re going to run out of these bottom-of-the-funnel customers to target. Instead, you’ll need to move up the funnel.
Running ads to shoppers who are less familiar with your products—or maybe not familiar with your brand at all—is critical for the long-term health of your brand, but it also means your return on ad spend won’t be as high. The more you focus on awareness, the worse your ACoS will get, at least at first.
What to keep in mind as you scale your ad budget
Expect stabilization. The initial dips in your return on ad spend are often the most severe. Eventually, as we work together to figure out the smartest new keywords, times of day, and parts of the funnel to target, we start to see your ACoS stabilize at an improved level.
To see what I mean, here’s a recent example from a client who enlarged their ad budget. As you can see, the client saw an initial collapse in their ACoS, even as total sales increased. Then, as the client perfected its new ad strategy, their ACoS stabilized at a higher level. (Remember, a lower ACoS percentage essentially means more bang for your buck.)
Be ready to invest in creative. As you expand your budget, you will also need to expand your roster of ads. Especially higher up in the funnel, creative becomes incredibly important. To convert shoppers who have little pre-existing awareness of your brand, you need to present them with clean, sophisticated visuals and videos.
There are exceptions to the ACoS rule. As we’ve discussed, you should in general expect your advertising cost of sales (ACoS) to get worse as you scale up your ad spend. But there are some important exceptions to this rule:
- Seasonality. If you have a seasonal product that is at or approaching its peak sales period, you’re going to have a lot more customers than usual that want to buy from you. In a peak period, you might not hit a ceiling with your ACoS.
- The flywheel bump. Every advertiser’s dream is to achieve a flywheel effect. As you convert more customers on your ads, your organic sales will see a concurrent jump, and your Amazon ranking increases. In the flywheel, your ROI improves, and you might see your ACoS get better, too.
Ready to increase your ad budget? At Acadia, we can help you devise a sophisticated advertising and creative plan to minimize the deterioration in your ACoS—and, better yet, set your brand up for long-term success. Get in touch with us for more.