Don't Run Google Ads Until You Know Your Gross Profit

Gross profit is the biggest indicator of whether Google Ads will work for your brand.

And if I'm honest, whether you even have a good business in the first place.

It's your total revenue after subtracting the cost of goods sold.

And it tells you how much you can spend to break even, on a new customer, before paying other costs in your business.

Here's Why It's Important

95% of eCommerce brands need to acquire new customers to survive.

To acquire a new customers with ads, it costs an amount of money.

This is your New Customer Acquisition Cost - nCAC.

To understand whether you can be profitable, and scale your brand, you need to understand the relationship between gross margin and nCAC.

For example:

Let's say your nCAC is $50 on $100 product.

At a 50% gross profit margin, you make $0 in profit with each sale.

That's because you bought/created the product for $50, and it cost $50 to sell it.

That means you're already at a breakeven total profit before you factor in additional costs such as overhead, employees, and new inventory....

At a 70% gross profit margin you make $20 in gross profit.

And that's for every sale.

So as you scale, your gross profit scales 1:1.

1 sale = $20

2 sales = $40

And so you can scale the brand to cover your other costs, because other costs won't scale 1:1 with your sales.

So before even thinking about your Google Ads strategy, you've got to ask yourself this question...

Can your average gross profit margin, factored in with the cost of traffic, be profitable to cover all the expenses for my brand?

Here's How You Find The Answer To That Question?

1: Work out your average gross profit margin.

There's 3 costs involved.

• Raw materials.

• Labor

• Manufacturing overhead (e.g. electricity, renting space, equipment)

Raw materials: Total cost of raw materials divided by the number of units produced. Example: If $500 worth of wood produces 50 houses, the material cost per unit is $10.

Labor costs: Total labor cost divided by the number of units produced. For example, if labor costs $200 for 50 houses, then labor cost per unit is $4.

Overhead costs: You can allocate a portion of overhead costs to each unit produced. Example: If your factory overhead for a month is $1000, and you produce 100 houses, overhead per unit is $10.

Material cost per unit + labor cost per unit + overhead per unit = Total COGS per unit.

2: Work out your break-even nCAC

Take the price of your product and subtract the COGS.

Or if you're doing an average calculation, take your AOV and subtract your average COGS.

That is your breakeven nCAC.

3: What is the cost of traffic + conversion rate you need?

Use Google keyword planner to find out your CPC costs.

Then divide your nCAC by the average CPC costs.

This tells you how many clicks you can get with your nCAC.

Then divide 100 by the number of clicks.

That is a rough idea what your conversion rate needs to be to break-even based on your gross margin and traffic cost.

So now you can answer the question.

I hope this email was useful.

Expect another from me tomorrow.

And as always…

Book a call with me to explore our options and see if we’d be the right fit to work together.

You can book a 15 minute intro call here