Why Most Ads “Don’t Work”

The “Secret” To Paid Advertising

One of the key metrics for your store is the Customer Acquisition Cost.

This means how much it costs you to acquire a new customer, who will then go on to purchase from you multiple times (measured by your Customer Lifetime Value).

In a moment, you’ll learn how to calculate these for your store.

So you can always know whether your ads are profitable or not.

Step 1 - Selecting Your Lead Product

First, paid advertising is difficult because you’re competing with all kinds of businesses (vegan or not) that want to also buy the attention of your target audience.

So choose your best selling product to be your Lead Product that you’ll use in your advertising campaigns.

Then calculate how much Gross Margin you make from that product after accounting for Cost Of Goods Sold, Shipping, and Distribution.

You’ll also want to look at the Average Cart Size for your Lead Product because sometimes people will buy 2 or an upsell, which increases the average amount of Gross Profit you make.

For example:

• Price $39.99
• Cost Of Goods Sold $7.25
• Distribution $1.10
• Shipping $5.50
• Transaction Fees $1.20
• Total Expenses $15.05
• Gross Profit $24.94

Step 2 - Customer Lifetime Value

Second, we want to look at our Customer Lifetime Value.

This is how much that customer is likely to spend with us over time.

If our average customer buys once per month for 2 years and 4 months, then our example would look like this:

Customer Lifetime Value = $39.99 x 28 months = $1,119.72
Customer Lifetime Gross Profit = $24.94 x 28 months = $698.32

If you don’t have a lot of sales history, then you might have to estimate this number in the beginning and it’ll get more accurate over time.

Step 3 - Calculate Your Allowable Customer Acquisition Cost

Finally, you need to decide how much you are willing to invest to get a customer.

But be aware that in the words of Dan Kennedy, “whoever can spend the most money to acquire a customer wins.”

A good start is being willing to invest your entire Gross Profit of the first sale ($24.94 in the example), to get back $673.88 (Customer Lifetime Gross Profit) over time.

That’s a 27X return in this example and your numbers will be similar (or better).

If You Understand This Strategy (And Use It)...

Then you’ll always know exactly what to do to succeed with your paid advertising campaigns.

But just realize, if your competitors are willing to spend $50, then you might have to do the same.

Proactiv Acne Treatment was initially sold by Guthy Renker using infomercials and turned into a billion dollar (per year) brand.

They were willing to pay 3 months of Gross Profit (that means lose money for 3 months) to acquire a customer, because they knew they would stay for over 2 years.

I’m not suggesting that is right for your business, but it’s something to consider when you’re competing against the big players with deep pockets.

Either way, this is the formula you need to understand to make paid advertising work for your Shopify store.