Andrew Maff 00:03
Please take some time to take a look at your CAC to LTV ratio. ROAS is a vanity metric, especially because attribution is a whole different beast now.
Narrator 00:11
Welcome to the E-comm Show podcast. I am your host Andrew Maff, owner and founder of Bluetuskr. From groundbreaking industry updates to success stories and strategies, get to know the ins and outs of the e-commerce industry from top leaders in the space. Let's get into it!
Andrew Maff 00:25
Hello, and welcome to another episode of the E-comm Show. As usual, I'm your host Andrew Maff. Today, I'm going to talk to you about the Q4 ROAS myth — something I'm kind of making up, that I think I'm actually going to trademark, because it's a real fucking thing. This past summer, I think it was in May, if I'm not mistaken, I celebrated 20 years in this industry, so I've been doing this for an obscenely long time. The interesting thing to me is that, especially ever since Amazon got into the mix, the Q4 ROAS conversation has always been an interesting one to have, specifically with founders. When we're speaking with other marketers, it's different — they kind of get it. But with founders, it's a bit of a different story, and I don't know if it's an inability to wrap your head around it, but here's how I want to explain this.
Andrew Maff 01:31
This is really the case year-round — it's just, for a majority of brands, exacerbated during Q4. ROAS should not be your top KPI from a marketing perspective. It just shouldn't be — I don't know what to tell you. I know a lot of our listeners are sellers on Amazon; some of you sell only on Amazon, some of you are also off Amazon. Amazon has caused this problem where it's shifted the mindset of founders and owners of e-commerce businesses in general on how they should be looking at their numbers, and it's actually stunting their growth. That's the part that always blows my mind — even when we sit down and do the math on it, it still just doesn't seem to click. So let me explain Amazon specifically. The biggest problem with Amazon is that a lot of that data is hidden. It's very difficult to figure out how many of your purchasers have come back and purchased from you multiple times, or what the LTV of those customers is — that's very difficult. It's also hard to figure out CAC, because of how Amazon has its advertising set up: for the average user, once they've purchased with you, if they search your brand name again, chances are they're just clicking on the ad. So you're basically repaying for them every time, which makes evaluating CAC and LTV on Amazon kind of pointless, because you're paying for them almost every time anyway. Obviously, if you have heavy subscription volume, that's a different story. But the issue really becomes that you can't evaluate how much you're paying per customer — you can only evaluate how much you're paying per purchase. The problem with that is, if you have a product that's a consumable, or something that gets purchased over and over, or even something people buy a couple of times a year, you can't evaluate it properly, so you're stuck limiting what you're actually able to see. This is the same case across the board, pretty much year-round. The problem is, that's never how you really looked at things before Amazon. Let's go back to the Mad Men days — if you ever watched that show, you'll never see the brand owner sit down with Don Draper and ask, "hey, what was the return on that billboard we did?" That's not a question, that's not even a thing — it makes no sense. They wanted to know how many new customers they'd generated from the campaign at the time.
Andrew Maff 04:37
It's the same thing, just at scale — instead of one large campaign, think of it as millions upon millions of little ones running at any given time, because of the impressions you're getting from a D2C effort. The problem is that if a brand is so heavily reliant on Amazon, founders tend to get stuck in their ways of looking at that side of the business the same way. So many founders look at their business like an ATM they're cashing out at any given moment — not like something they're building toward an exit. And when they do start looking toward an exit, that's when we see the mindset shift. That's when they start to realize the value of the business beyond the immediate profit that month, versus the profitability they'd see six months to a year from now, once they switch to thinking more in terms of a CAC-to-LTV ratio.
Andrew Maff 05:42
Let me explain, because this is also where it gets really interesting for Q4, and where some of you might actually want to change how you've got certain campaigns set up. Let's do some math — I'll keep it simple. Let's say you have a $100 product, and you need a 2x ROAS just to break even. A 2x ROAS means you need to spend $50 per purchase. So you're going to set up your ads, your campaigns, everything within that advertising platform, to make sure you're not spending more than $50 to get that $100 purchase — bear with me, I know that's technically break-even, maybe it's really $45, however you want to do the math. The issue is your data ends up limited, because you can only bring in so much given that target: you need profitability on each individual purchase, so you can only go after certain keywords that are more middle-of-funnel, where that customer converts at a fairly typical rate. The biggest problem is that founders think marketers are magicians. You're not — if a product converts at a certain keyword, but competition for that keyword is so high that the CPC is high enough, you'd need an astronomically high conversion rate that's just not realistic in most scenarios to stay profitable. So it becomes this constant push and pull of what's profitable and what's not. Some keywords have seasonality, some don't — there are a billion different ways to look at it.
Andrew Maff 07:45
When you're looking at that issue: let's say I have to acquire that purchase at $50, and it's a $100 product. What you end up doing is limiting your campaign budgets once they hit that 2x return, and leaving the budget alone as long as it stays above that 2x return. If it starts to dip below your 2x return, you're probably going to panic and pull ad spend back. But what if that $100 product is something someone comes back and purchases from you one more time a year? Just once more a year — that's it.
Narrator 08:38
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Andrew Maff 09:11
Take consumables, for example. We've got products people purchase every week, others that are monthly, some that are quarterly — maybe the average is 2.2 times a year, whatever it is. Every product is going to be different. But once you've figured out that LTV — let's say customers come back and purchase with you on average two times a year. Some people may not, some people do more, but let's say the average is two times a year. That's $200 — they purchase from you twice, at $100 a purchase. So you were aiming to get that first sale at $50, limiting your campaigns to not surpass that, because you wanted to be profitable on that first purchase, so it needed to land at $50.
Andrew Maff 09:59
If you're factoring in that over the next year — which isn't far away, I'm not saying look at LTV over three or five years — this is still an SMB mindset, still a bootstrapping mindset, still the idea that who knows where the business will be a year from now. I'm not talking anything grandiose here. We usually say 12 to 18 months; past that, you need a ton of data to really figure out where the business is headed. So let's say a year: they come back and purchase with you a second time, and that's $200. Because you set up that campaign to not allow conversions under that 2x return, you're limiting both your spend and the number of new customers coming in — but you made sure you profited $50 on that first purchase. Then they came back and purchased again, so you got that second $100 purchase too, but you're not getting enough volume, because you're not willing to spend enough to acquire the customer in the first place.
Andrew Maff 11:09
Now let's say you're looking at the CAC-to-LTV ratio instead. Say you know you can acquire a customer for $100 — bear with me, I know it's usually more like a 3x, but let's keep the math simple. Let's say you can acquire a customer for $100, and you know they'll come back on average and purchase a second time — that's another $100 right there. So your ROAS on that first purchase is technically still the same, but you've already increased how much you're willing to spend to acquire a net-new customer. You end up fully profitable on that second purchase, and you get significantly more purchases overall, because you were willing to spend more to acquire the customer in the first place — which most of your competitors won't do.
Andrew Maff 12:00
That's where the CAC-to-LTV ratio gets really interesting — that's where you see businesses start pouring gas on their advertising, because they're looking at CAC, not just direct ROAS. Amazon obviously makes this extremely difficult, but the other thing to keep in mind when you evaluate CAC is not to look at it from your advertising numbers alone — look at everything. How much are you spending on agency fees, if you're working with an agency? Factor that in. Factor in advertising across the board. Look at your Shopify data: how many net-new customers did you acquire? Forget breaking it down by individual channel — look at total advertising spend across the board. Going back to the Mad Men reference: they weren't saying how much we spent on this billboard versus this commercial versus this magazine. It was how much we spent on the campaign overall, because of the rule of seven — people need to see something seven times before they really start to remember it, whether they convert or not.
Andrew Maff 13:06
So trying to calculate ROAS for a billboard versus a magazine might be completely pointless. It's very similar today: if you've seen an ad several times on Instagram, but you happen to be on TikTok when you finally click on it, TikTok gets all the credit and Instagram gets nothing. You think, "oh, Instagram sucks," so you pull it back and pour gas on TikTok instead — but now you're not actually doing top-of-funnel anymore, and you've lost out. That's where things go wrong. You have to look at everything holistically, and that's where CAC comes in.
Andrew Maff 13:38
You can break it down on a per-channel basis, but the difficulty sometimes is evaluating, within each individual marketing channel, whether the person who purchased was a new customer. Sorry, I had to pause for a second — I sneezed. That's the problem: you don't always know, on the individual marketing channels — say you're on Meta, TikTok, or Google — whether someone's a new customer or not. If they're searching your brand name on Google, you can kind of infer it, but either way, you're still better off looking at your overall ad spend across every channel versus how many net-new customers are coming in, versus your LTV. That's where you can suddenly start pouring gas on things, because you see that all of your marketing efforts are working together collectively to acquire new customers at a given rate, while your retention efforts are what keep them coming back and spending again and again. So obviously, you need things like email marketing, SMS, and rewards programs dialed in too.
Andrew Maff 14:44
This is where it gets ugly in Q4. The reason I wanted to have this conversation today — I believe this airs mid-September or so, so you still have time to change your campaigns if you need to — is that giving up an obscene amount of margin for huge discounts in Q4, because you think that's what's going to help you stand out, is one of the biggest mistakes you can make.
Andrew Maff 15:10
One, you're training your customer to expect your products at that rate. Not all of them — I know it's not every one — but a good chunk will just sit around and never purchase from you until you go on sale. Now you've become one of those brands that's constantly on sale — there's X percent off this, X percent off that. They won't purchase from you at regular price without some kind of sale, and it starts bringing in a very challenging customer base too, because you get people constantly reaching out to customer service with, "this used to be on sale, why isn't it on sale now?" — a hundred variations of that question. It becomes a bigger problem, and it has a real trickle-down effect.
Andrew Maff 16:01
The other side of it is the CAC-to-LTV angle. During Q4, you end up with a lot of people purchasing gifts — they're still purchasing for themselves too, but a lot of it is gifts. So you end up thinking, "I'm going to acquire net-new customers during Q4 to set myself up for 2027, and I'll run a huge discount because I'm willing to give up more margin to bring in all these new customers, since conversion rates are typically higher and it works out a bit better." You're not wrong, but the biggest problem is that it's a different type of customer. During the rest of the year, things are pretty general — people are people, you'll have a sale here and there, sure, they'll buy gifts for friends occasionally, and that's baked into the average. But during Q4, that behavior is exacerbated — it's pushed to the edge.
Andrew Maff 16:58
What you really have to do is pull a customer cohort — a group of all your net-new customers from 2025, or maybe even 2024, since that group has had a full year to play out — and look at everyone who converted in Q4 2024. Even if you just look at November and December, look at what their LTV turned out to be, because it could be very different from the rest of your customer base. If it is, you may want to reapproach the discount you're planning to give up this Q4, because you need to think about whether you actually need to be profitable on that first purchase — because you don't know for sure whether those Q4 customers will come back and purchase again, or on average how much lower their return rate might be.
Andrew Maff 17:46
Yes, it's also possible that they're gifting something to someone who then comes back and purchases from you directly — but don't go down that rabbit hole, it's a nightmare, you'll never figure it out. If that person comes back and repurchases in the future, great, they'll get folded into the cohort of regular customers during the normal year.
Andrew Maff 18:15
During Q4, though, you really have to look at how many people converted with you in Q4 in years past, and what their LTV is, because it's a very different group — especially if you have a giftable product, and especially if you've run huge sales in the past, because that brings in people you wouldn't normally attract, which muddies up the data a bit. So I always highly recommend looking at Q4 customers from prior years and their LTV, and then, once you have that, evaluating what type of sale or discount you actually want to run in Q4 — which, by the way, is a common misconception: you don't have to run a sale in Q4 at all. So many brands do really well during that time of year without any sale — they do things like "buy this, get this gift," or "spend X and get this gift," or VIP programs, and other things you can do outside of just slashing 20% off the whole website. Don't just default to that.
Andrew Maff 19:26
Honestly, so many brands do the straight-discount thing that you end up looking just like everyone else — your sale doesn't stand out. You've got to do something different if you want to actually stand out; you can't do what everyone else does. So that's kind of what I wanted to talk about today, because you've still got time — it's mid-September by the time this comes out, I believe. You know your campaigns — you probably have something a little top-of-funnel going on in October, typically, and then obviously your November and December push. That's where you want to start reevaluating those discounts. You don't need to go so high, and in some scenarios, you probably don't want to, because it might actually end up hurting you in the long run.
Andrew Maff 20:09
You absolutely want to look at your CAC-to-LTV ratio, without question. Stop worrying about your ROAS — worry about how much it's costing you to acquire a new customer, and then look at how much they spend with you on a regular basis. That's where you see the math that tells you when to pour gas on things. If every customer is worth $1,000 to you, and your ad spend is half of where it could be because you wanted to be profitable on that first order, your growth is going to be significantly slower. Say you got 100 customers that month, so you did $100,000. Well, if you suddenly realize, wait, I can acquire these customers and they're going to come back — they'll spend $1,000 with me over the course of the year — you could spend $10,000 right now and get 10,000 customers, and all of a sudden you're getting 100, 200... I forget what the math works out to. Told you I wasn't in the mood for math today — but that's the point where you pour gas on it.
Andrew Maff 21:14
So especially during Q4, if you can pull the data and evaluate what the LTV is for that customer base — and if it holds up — you're in a great position to pour some gas on Q4 and acquire those customers to set yourself up for 2027. But if that customer base doesn't come back and shop as much as you'd expect, you really need to reevaluate both the discount you're offering and how much you're putting into advertising. Big thing here: please take some time to look at your CAC-to-LTV ratio. ROAS is a vanity metric, especially now that attribution is a whole different beast. That's what I wanted to talk about today — appreciate your time. As usual, do the whole fun thing: rate, review, subscribe, all that fun stuff, on whichever podcast platform you're listening on right now, or head over to theecommshow.com and check out all of our previous episodes. Thank you all for your time, and I'll see you next time. Have a good one!
Narrator 22:08
Thank you for tuning in to the E-comm Show. Head over to theecommshow.com to subscribe on your favorite podcast platform, or on the Bluetuskr YouTube channel. The E-comm Show is brought to you by Bluetuskr, a full-service digital marketing company specifically for e-commerce sellers looking to accelerate their growth. Go to Bluetuskr.com now for more information. Make sure to tune in next week for another amazing episode of the E-comm Show!