As businesses grow, expanding into new markets to reach a wider audience is a natural, often a part of the growth, and usually a must. However, global expansion comes with new costs and different costs per market, adding complexity. And the answer "Does it make sense for your company to spend more in a certain market?" might not be as simple as it should be. What should you base that decision on? Allocating your marketing budget between different markets can be a daunting task. But to win in e-commerce and grow your bottom line, you must find a way to execute budget reallocations between markets quickly and precisely.
Why many use ROAS for budget allocation, and why it should not be used
Marketers and leadership are often misled when deciding on the budget allocation between markets. Most commonly, the internal data silos make many settle for Return On Ad Spend (ROAS) or Cost of Sales. And that's not ideal, and those KPIs should not be used when allocating marketing spend between markets. It negatively impacts e-commerce businesses' profitability and increases the risk of missing out on growth opportunities.
ROAS (Gross Sales / Marketing Spend) misses some of the most significant cost drivers, such as product returns, COGS (Cost Of Goods Sold), and fulfillment costs, which can all differ a lot between countries. Since everyone knows this, the common practice to make up for it is not to fix the data but to have different ROAS targets for different markets. How is that target set? Generally, it is based on "an analysis done by someone a very long time ago" that looks into the cost structure of each market.
Why you should not use different ROAS targets in different markets, and what to use instead
Even if someone did an excellent analysis that resulted in the different ROAS targets for each market, when working with it, optimizing for ROAS in ad campaigns, etc., the market-specific profitability drivers will be missed. These can be fluctuations or differences in product return rates, Gross Margin, fulfillment costs, or the average order value.
So, instead of using ROAS, consider utilizing a profit ROAS metric. In Dema Platform, the most granular is called epROAS. It provides a more realistic picture by considering all the significant cost drivers, giving e-commerce businesses their actual return on their ad spend.
epROAS = (Gross Sales- Returns - COGS - Fulfilment Costs)/Marketing Spend,
Using epROAS, you can allocate your marketing budget based on each market's Contribution Margin. And thanks to Dema, you follow this daily. It allows you to maximize the profit captured by constantly investing your marketing money, where it contributes with the highest return.
Case: Budget allocation using ROAS vs epROAS
Let's say we are selling our products to the UK and Germany.
UK sales and marketing spend
$600,000 in gross sales,
$90,000 in marketing spend
ROAS: 6.67
Germany sales and marketing spend
$400,000 in gross sales,
$100,000 in marketing spend
ROAS: 5.71
If we look at ROAS, with or without ROAS targets, it isn't easy to act on. But the gut feeling says that we should move spend from Germany to the UK.
If we add the full picture of these markets
Suppose UK have
$600,000 in gross sales,
$90,000 worth of returns,
$200,000 in COGS,
$170,000 in fulfilment costs,
$90,000 in marketing spend
Gives us $50,000 in a Net Gross Profit 3 (ie, Contribution Margin)
epROAS: 1.56
In contrast, Germany generated
$400,000 in gross sales,
$40,000 worth of returns,
$150,000 in COGS
$70,000 of fulfilment costs
$100,000 in marketing spend
Gives us $80,000 in a Net Gross Profit 3 (ie, Contribution Margin)
epROAS: 2.43
The reality is that you should move spending to Germany if you want to maximize profitable growth.
Decisions about budget allocation between markets are much more manageable and clear now. Move the money where the return is the best.
How much should I spend, and how fast should I reallocate it?
You should move spending from countries with bad epROAS to countries with good epROAS until you have the same epROAS in all markets; then, you know you can't make more money by moving spend from one market to another.
It depends on increasing and decreasing marketing spending in most, if not all, ad platforms. Generally speaking, if you are not used to reallocating based on profit, do it slowly. When you know how it scales, you know how fast you can move the spend in the future.
Conclusion
Allocating your marketing budget between markets based on profitability is crucial for the growth and success of your e-commerce business. Using epROAS instead of ROAS gives you a more accurate picture of each market's actual return, allowing you to make fast, data-driven decisions about where to allocate your marketing spend. With Dema, tracking and analyzing epROAS becomes effortless, ensuring you never leave money on the table and always maximize your profits.