Here’s a question I get asked a lot when I advise clients on their ads:
“When do I scale my ads?”
Or
“How do I know when I should spend more or spend less?”
It’s a critical decision that can significantly impact the growth and profitability of your business.
The key to answering this question lies in understanding two essential metrics:
1) Customer Acquisition Cost (CAC) and
2) Average Order Value (AOV)
Here’s what they mean…
Customer Acquisition Cost (CAC):
This is the total cost of acquiring a new customer, including expenses on advertising, marketing, and sales efforts.
For example, if you spend $500 on advertising and acquire 50 new customers, your CAC is $10.
Average Order Value (AOV):
This is the average amount spent by a customer in a single transaction.
If your total revenue from 50 sales is $5,000, then your AOV is $100.
Here’s the formula to know WHEN to scale your ads:
If your CAC is less than your AOV, it’s time to scale.
This means you are acquiring customers at a cost that is lower than the revenue they generate in their first purchase.
2 reasons why this formula makes sense:
Profitability: When CAC < AOV, you are making a profit on every new customer from their initial purchase.
Growth Potential: Lower CAC compared to AOV indicates that your marketing efforts are efficient, and there’s room to increase your ad spend to attract more customers.
For example…
Let’s say your CAC is $20, and your AOV is $50.
For every $20 spent, you are making $50 in revenue.
This $30 difference means your ad campaign is profitable, and you have the green light to scale your ads.
Increasing your ad budget in this scenario should proportionally increase your customer base and revenue, maintaining profitability.
Then how do we know when NOT to scale the ad spend?
When CAC is higher than AOV.
If your CAC is higher than your AOV, say CAC is $50 and AOV is $40, you are losing $10 for every new customer.
Scaling in this situation will only amplify your losses.
However, there’s an exception to this rule.
The High-Ticket Backend Product Strategy
Even if your CAC is higher than your AOV, you can still scale your ads if you have a high-ticket backend product or a strategy to increase customer lifetime value (CLV).
Let me explain…
Backend products are additional products or services that you sell to your existing customers AFTER their initial purchase.
If you have a high-ticket backend product that you can sell to, chances are, you will be able to make your whole campaign profitable even if CAC>AOV.
How this method usually works is that you run ads to a low-ticket (or promotional) offer to acquire customers…
Then later on you upsell them a high-ticket (premium) service.
This way, you will be able to offset the initial loss when selling the low-ticket item.
Let’s look at a simple example:
Assume your CAC is $50, and your AOV is $40, this results in an initial loss of $10 per customer.
However, if you have a backend product priced at $200, and you successfully upsell this product to 20% of your new customers, the number changes.
Out of 100 new customers, 20 purchase the $200 product, which means this generates an additional $4,000.
This revenue can more than compensate for the initial loss of $1000 (loss of $10 per customer for 100 customers).
Which means it’s now possible to scale your ad spend.
I’ve seen this happen many times across different industries.
Gym, spas, beauty salons, tuition/enrichment centres…
So I know it’s possible for these businesses to scale even if their front-end low-ticket product is making losses.
Conclusion
Scaling your ads effectively requires you to have a clear understanding of your CAC and AOV.
If your CAC is less than your AOV, it signals a profitable campaign with room to scale.
Even if your CAC is higher than your AOV, a strong backend product strategy can still make scaling feasible.
You need to closely monitor your data and calculate these metrics consistently if you want to scale your ad campaigns.
That’s why running ads is both a creative and data-driven process.
The creative part has got to do with how you write your ads, how you create videos and images.
Data-driven part is basically tracking and knowing your numbers well.
The clearer you are, the easier it is to scale your business via ads.
