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How To Turn Paid Ads Into An Investment Instead Of Expense

In the profit & loss statement of a business, marketing costs (like paid ads) are always classified as an operating expense.

Technically it’s right. But I’ve always viewed paid ads as an investment instead.  

But I dare to say that now only because I’ve finally figured out how to turn my Facebook & Instagram ad costs into profits.  

That means I know exactly how much profit I can generate for every $1 spent on ads.  

If you know for every dollar spent on ads, you can generate $2 in sales… 

Then would paid ads be considered an expense or an investment? 

In this letter, I’m gonna break down what it takes to turn your paid ads into an investment… and what you need to make that happen.  

1) Know your customer acquisition cost 

If you’re running paid ads to get leads or sales, you need to know how much you’re spending to get a new customer. 

If you run an eCommerce, it’s basically your cost per sale. If you spent $100 per day on ads to get 5 sales, your cost per new customer is $20.  

If you run a service business (tuition, real estate, etc), you can also calculate your customer acquisition cost. To do that, you need to know what your conversion rates are.  

Let’s say your cost per lead is $30.  

Not all leads become paying customers. So you need to keep track of the percentage of leads that convert into customers.  

Let’s say out of 100 leads, 10 of them become paying customers.  

So your conversion rate is 10%.  

Since your cost per lead is $30, you spent $3000 to get those 100 leads.  

But only 10 became customers. So the cost to acquire 1 customer is $300. ($3000/10) 

2) Know the average value per customer spends with you 

Now that you know your cost per customer, then you need to know how much value that one customer brings in.  

In eCommerce terms, we call it ‘Average Order value’ (AOV) 

What is the average amount someone spends with you on your store?  

The average order value of my eCommerce store is $110. (You can easily see this from Shopify’s dashboard) 

Here’s the important point:  

If your AOV is more than your cost per customer, you will have a positive ROI on your ad spend. 

That’s how I actually turn my paid ads into profits. 

And it’s also why I see my paid ads as a form of investment.  

Because my AOV is $110. My average cost per customer is about $35. That gives me an overall ROI of 3X.  

That’s not all. These buyers go into my email list and I continue to sell them other products by sending them emails. 

Most people think that emails don’t work these days… but those who know, know. (I will save this topic for another day) 

However, I can quickly share with you that my email list of 9000 subscribers was what saved my business during covid-19 pandemic.  

Every week, I sent emails to get sign-ups for my music workshops. I didn’t have to rely on any ads to generate revenue.  

What’s needed to ensure your money spent on ads becomes an investment? 

3) Work backwards to hit your goal 

Before you do this, you need to know your numbers clearly.  

You can’t come up with a clear plan if you don’t know them.  

You need to know: 

Your cost per lead The % of leads that goes for an appointment/trial The % of appointments/trials that convert into customer 

These are questions I ask my clients a lot when they work with me to scale their business. 

Because knowing these stats can help me to work backwards and hit their income goals. 

Let’s use a tuition centre example. 

Let’s say you’ve just opened up a new centre, and you want to get 100 new students for that year.  

Based on your past campaigns, you know that your cost per lead is around $30, and your conversion rate to close a lead is 10%.  

That means your cost per customer acquisition is $300. 

To get 100 students, you need to spend around $30k to acquire them. (100 students x $300) 

You need to budget at least $2.5k per month on ads. ($30k divided by 12 months) 

Is it worth it? Let’s see. 

You spend $300 to acquire a student. 

Each student gives you a yearly revenue of $2400 (assuming fees of $200/month)  

You spend $30k to acquire 100 students. 

100 students gives you annual revenue of $240k.  

That gives you a 8x return on ad spend. ($240k revenue divided by $30k ad spend) 

Depending on your overheads, this should still give you a profit at the end of the year.  

Of course there are a few assumptions at play: 

Your student follows you throughout the year Your lead conversion rate is 10% Your cost per lead is $30.  

The crucial thing is knowing your metrics allows you to work out your goal clearly.  

It’s the first step to turning your ad expense into an investment.  

Once you start getting leads in consistently, the next thing to do is to improve the numbers. 

Increase the % of leads to appointments. 

Improve the cost per lead. 

That’s how you get a higher return on your money spent on ads. 

It’s easier said than done, but that’s part of entrepreneurship isn’t it… 

To constantly fine-tune processes. 

If you want to drive down the cost per lead… 

Are you testing enough ad creatives and ad copy? 

If you want to increase your appointment rates… 

Are you implementing new strategies to improve the numbers? 

For example, instead of texting yourleads to fix appointments or free trials, would calling them increase the appointment rates? 

These are all the little tweaks that can have drastic changes to your overall performance.  

If you want to increase your average order value… 

Are you bundling products/services? 

Will you offer discounted packages?  

Remember, when your AOV is higher than your cost per customer acquisition, your ROI will be positive. 

You have enough profits to reinvest back into your ads to get even more customers. 

This feels like a Math class… 

But I hope I’ve managed to explain these concepts in a simple manner for you.  

And to really help you understand why spending on paid ads is actually a form of investment into your business.  

Know your numbers. 

Set a goal. 

Work backwards and do whatever it takes to hit it. 

Who Is Edmund Chew?

I own a 7-figure music education company called TravelClef. I help fellow business owners scale their business using paid ads. I’m obsessed with marketing and entrepreneurship.

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