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You've been setting up your ads wrongly this whole time! Are you losing money on ads? Do you think you're spending too much on a single product? Do you really know which ones you should turn on and which ones to turn off?
It's easy to get lost in advertising the moment you start to feel that everything is in order. Once your ads start working, you would think that it's a one-size-fits-all thing, wherein you use your ad strategies for each of your products when in fact they should be well personalized. Don't worry, though, because in this post, we are going to tackle one simple trick to determine which products you should sell, and which ones you should remove from your business. It all comes down to the numbers.
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ROAS is short for "return on ad spend" and it is basically a measure of how much money you earn from your ads in relation to how much you spend on them. Breakeven ROAS is then the amount of money you need to earn from your ads in order to breakeven.
Net Profit = [ Selling Price ] - [ Cost of Goods ]
BE ROAS = [ Selling Price ] / [ Net Profit ]
Let's say for example your BE ROAS is 1.43. If we are spending $100 on Facebook ads, we need to be able to earn at least $143 in order to breakeven. Basically, anything below the BE ROAS means that you are losing money; anything above, however, generates profit.
Said profit can already be used on ads (this will depend on how much you want to pay, though).
Another thing to take note of is that you can afford a lower BE ROAS when you have a high-margin product. This is the reason why in our business, the ideal product to sell is that with a high margin.
Margin (%) = [ Net Profit ] / [ Selling Price ] x 100
Let's go one step further on the numbers game.
So, let's say we spend $10 on our ads for a specific product. Our net profit would then change, and will be calculated as follows:
Net Profit (new) = [ Selling Price ] - [ Cost of Goods ] - [ Cost Per Purchase ]
BE ROAS = [ Selling Price ] / [ Cost Per Purchase ]
Dragging the numbers down a bit and assuming that we would spend everything on ads, we would end up with no profit at all, with our ROAS equating to our BE ROAS. This only means that we shouldn't go overboard trying to sell our products via ads if they do not show any signs of profitability at all. No matter how good your product might be, as long as people are not buying it, you shouldn't force yourself to "believe" in that product any longer.
So, what have we learned from this simple analysis?
- Only sell products with high margins. Said products have better BE ROAS results, and they would allow you to spend more on ads in case you wish to scale your business up. Moreover, these are products that are proven to be profitable, so you wouldn't have much problems with advertising at all.
- Turn off ads for non-profitable products. If you are here, chances are, you are a small- to medium-sized business looking for dropshipping tips. In that case, it shouldn't be hard for you to monitor each and every single one of your products. If you find that one is not doing so well no matter how hard, turn ads off for them and move on to better products.
- Keep an eye on your ROAS. The ROAS is arguably one of the most important factors in the determination of your whole business' profitability. Be sure to monitor these numbers, as well as how much you are spending on your ads.
Of course, there are other factors to consider when assessing the profitability of a product, but if that specific product is already losing on the numbers game, then it's high time you reconsider your strategies.
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Let's Wrap It Up!
Today we have discussed a short analysis on how you can determine which ads you need to leave on and which ones to turn off. Remember that it all comes down to your ROAS calculation -- this integer is a big help in the determination of the profitability of your product. I really hope you got a ton of information out of this post -- if you have any questions, feel free to ask.
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