E-commerce Profitability

How E-commerce Companies Should Allocate Marketing Budget Between Markets to Maximize Profitable Growth

Marcus Tagesson
November 14, 2023

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), fulfilment 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 based on "an analysis done by someone a very long time ago" that looked 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. It can be the fluctuations or differences in, product return rates, Gross Margin, fulfilment costs, or the average order value.

So, instead of using ROAS, consider using 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 true 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.

The decisions about budget allocation between markets become much more manageable and clear now. Move the money where the return is the best.


How much spend should I reallocate, and how fast? 

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.

As with increasing and decreasing marketing spending in most, if not all, ad platforms, it depends. Generally speaking, if not used to reallocate based on profit, do it slowly, and 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. 

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