negative ROI. 0 if you are lucky.
majority of the guys running ads lose money on the first sale. they can do that because they can get you to pay them for much more than just the first sale.
think about uber/grab, they gave out 2 referral free rides. if you just stopped there, they would have lost money. assuming they make 30% and the average trip is $10 and coupon is $10, that works out to about 7 paying trips just to breakeven on their money. uber and grab is very confident they can get you to use their service more than 10 times. any less, its their loss.
this finding is consistent across different companies. hotel X runs promotional campaigns on their accomodations. their expected result? ROAS 1 is to 1. ROAS = return on ad spent. ROAS is typically about 3-4x of the actual product price. they expect to spend $1000, in order to sell a hotel accommodation package of $1000. the price of the actual cost of accommodation is not included in the calculation. the hotel accommodation probably costs around $300. this works out to an investment of $1300 for $1000, a -23% return.
so why does the hotel want to run a negative ROI ad? because they are confident that you will take a series of possible actions
- use the services in the hotel such as massage, laundry service, conference room, etc
- purchase food and drinks
- stay in their hotel(or other hotels) again
- refer a friend to come join you and purchase an accommodation package.
if you were to sum up the average lifetime value per customer… i would guess its somewhere in the 5,000-10,000 range.for a smaller hotel to do exactly the same, is extremely difficult. why? they dont have that many extra services, and perhaps they dont sell food, and maybe that was the only hotel they have and there is no other hotel.this is what we refer to as the strength of the product/service, expressed as its CLTV (customer lifetime value). the smaller hotel cannot place as high a bid, and either receives much lesser traffic and lower quality traffic. the smaller hotel is “priced out”
why would they run a negative ROI campaign? as with all advertisements, its generally open to public, and the highest bidder wins. usually, the highest bidder is also the company that makes more dollars per deal, more repeated sales, and higher sales frequency. this is similar to the Customer Lifetime Value. there is high competition now in Facebook, and once the price of advertisement drops, there is another company that would willingly take up the 2nd highest price bid. the highest bidder, is the one with the highest customer value.
insert image or short video of ezra firestone showing his facebook ad account ad spend and revenue – explaination of what hes doing and why hes not earning on the first sale.
How does Ally Media run its ads and how does it perform? We run ads periodically to advertise our client services. In terms of ROI, we have somewhere between 2000% to 5000% (or 20x to 50x). these numbers look unrealistic. this is because we have been creating content to connect with the audience since June 2020. We have built up a higher level of trust. Those who respond to our ad, are not seeing us for the first time. they have probably watched at least 7 of our other videos, before deciding to talk to us. Based on empirical evidence, someone who is “known” can gather a response of around 20-50x vs someone who is unknown. in another case example here, stories helped to increase the items by 6300% > this is only the story component. compared to our other profiles, it still lacks the utility and the connection element.
most advertisement campaigns are not backed by an organically grown following. this gives u a much worse result when compared to someone who has built an organic following thru time by giving value.
what about all the other postive ROI campaigns you heard about? yes this is true, but theses cases are far and few. it could occur because of a few reasons
1. their product/service is of very high value, and in demand. usually when this is the case, it will be profitable regardless of the ad format (whether its search on google or Facebook mobile news feed or youtube ads) even without any online ads at all, they would still sell well. this is the dream product/service everyone wants to promote. this product/service is usually very difficult to make/provide, and few others in the market have a product of this strength. a lot of R&D is required to produce this kind of product/service.
2. the traffic is underpriced. Facebook ads today costs around say CPM $30. the same ad 5 years ago was only CPM$10. for those who run ads to products with lower margins (after ad cost), will do well in the initial phase of the traffic network, but then drop out once the CPM price doubles. this is our common experience with advertising before. all advertising starts from a very low attractive price, and then slowly increases until you are priced out. these products, do not typically do well on already mature advertising platforms. they are only possible to promote because of the discounted traffic.
3. ad blindness. people get sick of seeing the same ads everyday. at the start, it is a fresh new interesting feature. over time, the ads are seen as interruptive and undesirable. ad blocker softwares are getting more and more popular and in use.
what if they dont return after the first sale? then you have to focus on the product and see whats wrong. speak to the customer to find out what is stopping him from continuing. this problem is a product quality issue, and not a marketing strategy issue.
so what can u do to get involved?
- participate in traffic networks that are in its early phase. this is usually when there is alot more viewers and creators. you will be able to get the traffic for a lower price or with less effort.
- invest in R&D to improve your product/service quality – while this is more important than marketing, we will not go in depth into R&D because its generally highly specialised.
- build an organic account and post organic videos – your account reputation, will help to give you lower prices when running advertisements, or maybe get traffic just from another organic post.