ROAS is killing your profits

"Ecom" and "DTC" brands tend to classically be run by marketers. So profits are a product of adspend efficiency. Minimal operating costs. Scaling creative.

Many killers over the last two decades used this playbook to make millions.

There's only one problem: It's killing your margins and killing your brand.

Selling a product at 3x, 4x, 5x landed cost is an amazing feat of supply chain optimization, geo arbitrage, and marketing positioning. Why throw away your hard-earned profits by giving 30%-50% to Meta and Google?

I say this with great perspective as a former marketing agency owner.

Yes, you must spend money to make money.

But are you a marketing company selling commodities? Or a product company investing in reaching the market?

Sure, there are cases where a single SKU crushes and has some crazy 10x ROAS. Or one ad kills it and drives equally insane returns.

But these scenarios are the exception, not the rule.

Really, you should chop your P&L in half

One profit stream for incremental new customers, and one profit stream for existing customers: re-orders & new products.

Effectively this means investing heavily in marketing (adspend, marketing agency, photoshoots, creator marketing, etc. etc.) on the new customer side, and investing heavily in R&D on the existing customer side.

This is something that I think many ecom founders get wrong by hyper focusing on one or the other at sub $100m scale.

You have your ecom bros out in Dubai talking about VSLs and funnels and direct response ad copy. Posting about $1m/mo but eking out 3% profit margin & a crap load of Amex gold card points.

And then you've got your farmer in Ohio that hit it big on a special water filter or potato peeler, or torque wrench, or roofing gloves & goes from v1 to v2 to v3 etc. etc. Making 40% on every unit but shoveling money into a furnace trying to crack the code on getting bigger.

Brands need both things!

And this is where a clean revenue mix shines to put more dollars into the bottom line.

Cut your Meta bill to zero tomorrow. What's left?

This is a true litmus test of brand vs. arbitrage.

If Meta gets cut and product doesn't move, you don't have a brand. You have a business arbitraging ad dollars to sell commodity products.

If you stumble across the magic formula to rip Meta ads at 10x ROAS on a high margin product, max that thing the f out.

But, in time, all arbitrage gaps close and advertising succumbs to the law of shitty clickthroughs. So you know that return stream won't last forever.

The difficult thing is to simultaneously keep an R&D pace to continuously release new products into the brand, something that the fashion industry does incredibly well.

Fashion typically does seasonal releases.

The best brands release even faster than that.

It is so easy today, to create new products

The "inventor" of the 1800s didn't have Alibaba. They didn't have a 3D printer in the basement. Or the machine shop that contracts to Ford & Boeing down the street.

Invest in R&D.

Build the product catalog & don't overthink it.

High margin accessories are a repeating trope in many industries for a good reason.

Here's the math:

• Spend $30 on ads to acquire a customer at $100 order value
• COGS is $30
• Operating costs at current scale work out to another $30
• You make your 10% on that order, a nice but not crazy $10 profit

3 months later:

• Release new item that same customer buys for $100
• Cost to email them is $0.01
• COGS is $30
• Operating costs $30
• $39.99 in profits at 39.99% profit margin

This is the goal of DTC. Without Zuck in the middle, it's a high margin business.

Of course there's other factors - your pricing / AOV needs to be high enough, the industry needs to have enough room, your competition matters, etc. etc.

But at the end of the day this dynamic holds across any brand spending dollars on ads and every day checking Triple Whale, or Northbeam, or whatever else.

ROAS matters. But we are in business to make money. And I'll take higher profits every time.