Stop Blaming CPM - This 1 Formula Tells You If You Can Scale

The Scaling Lab-Tried & True Media: Welcome back to another episode of the Scaling Lab. I am here today to deliver to you a framework that we think of here internally at TNT for how to make scaling decisions. Because if you do not have room in your CPC to afford clicks at a competitive value, you're losing money on every click and you often want to blame CPM. What can we do to get CPMs down?

And we argue that that's the wrong question. So we're to look at a formula for how we analyze exactly how much you can afford to pay for a click. and how that delta helps inform scaling decisions. So without any further ado, let's get into what you came here to see.

Now, sometimes it can seem quite obvious. Is there more revenue in the bank than we are spending to acquire customers? And that drives scaling decisions. That's fine.

But in platform, there are some things that we can look at that indicate or help qualify those scaling decisions. And one of them is what we call allowable CPC. Now, it's really easy to get hung up on... arguing that your CPM should be lower if you see that those are creeping up, which they have been over the last forever, basically.

⁓ That's just the trend of the market. The clicks are always going to be getting more expensive. Now, if you just look at CPA or ROAS and you're just trying to optimize towards that fixed value, you might be overlooking some of the levers that give you deeper insight. So that's what we want to do today.

So when I talk to brands, I see that almost no one is asking that question of what can we actually afford. to pay for a click. this is something that I've seen CMOs, brand operators, growth leads look at the way we evaluate this and say, I've never thought about it like that before. So it relates to an old concept called ⁓ max pay per click that you may be familiar with, but allowable CPC is the way we think about how you can inform scaling decisions at the CPC level without thinking about.

⁓ The reason that we think this is important is because you have to focus on the things you can control. It's far too often that people are out there saying CPM is the problem, the algorithm is the problem. And sure, there are those problems. But if you don't focus on what you can control, then you're stuck on the hamster wheel of trying to fix things that you can't do much about.

And we argue that if you focus on the things that you can do something about, you're going to get to results faster, regardless of what happens with those other levers. So we believe the one number that brands should be thinking about or being able to tell me as we're doing like initial discovery conversations is how much they're able to afford ⁓ to pay for a click. And if they don't understand that number, we dive into the formula. So to quickly share with you what those formulas are, if it's a ROAS based brand, the allowable CPC is your AOV times your CVR divided by your target ROAS.

And if it's a CPA based brand, it's just your target CPA divided by, or excuse me, multiplied by your conversion rate. Now, there is one caveat to that for LTV based brands. You're going to want to sub out AOV with LTV because ⁓ if you have a low front end AOV, it's going to look like you have a really low allowable CPC, but we can get into that later. And so what I like to think about is operationally when a brand thinks that ⁓ they're able to continue scaling.

They can get themselves in trouble by looking at ROAS or looking at ⁓ their CPA, but not understanding that they're actually at a negative on their allowable cost per click. This allows us to look at a unit economics perspective instead of just looking at a pure ROAS perspective, because sometimes in a brand's model, there might be things missing from their ROAS target or even CPA target. And if that's not fully baked, then you could be losing money while thinking you're hitting targets.

So to summarize, if you've got a positive gap on your real CPC, meaning it's like a buck, but your allowable CPC is a dollar 50, well, then you've got room to push up regardless of ROAS, regardless of your CPA. ⁓ And you need to get into your model to see where you might not be attributing something into the model because you you're overlooking something. On the contrary, if you're at a negative, meaning let's say that allowable CPC is still a buck 50, but you're paying a buck 75, you're bleeding at every single click.

Now there usually are downstream indicators like being off target with CPA or ROAS. But again, I've seen situations where people were at a negative on their allowable CPC, but they thought they were just fine. on their CPA or ROAS because they didn't have a fully robust model for their financials. Now one quick note that I'll say here is that if you're a CPA brand, we tend to lean towards optimizing for ROAS because ROAS can stay stable as other values change.

So specifically, if your AOV is changing and your CVR is changing, but you know that your business needs to hit a 1.6 or let's say a 0.8 or whatever it is for your business, we can continue to hit that and optimize towards that while those other things move. If you're at a CPA of, let's say, $50 or $100 that you are willing to pay for a customer, but then you get a higher AOV and you also get a higher conversion rate, then we have to re-optimize towards the new target and fine, it's easier to increase that than decrease that, but you're still shooting for a different number when you've already trained Meta or Google to go after customers at a specific value.

So going after value-based goals like a target ROAS, is preferred for us and I would encourage anyone always to go after that type of a target. Another thing that I'll say based on focusing on the levers of conversion rate and AOV that if you have an increase in conversion rate that's actually an engagement signal back to Meta or to Google that people want what you're selling and that can reward your CPM so that can bring it down. So if you're focused on changing your landing page or compliance in your ads or other things that might drive down CPM you're focusing too much energy on engineering down your CPM when really what you should be doing is focusing on increasing your conversion rate and increasing your AOV and that can have an impact on driving down your CPM.

so another thing that I think is commonly and widely accepted is always driving up AOV but some of the brands that we have high-tech AOV for supplement offers that are around the 250 to 300 range Sometimes when we bring that down, conversion rate goes up and then CPM is rewarded. So if you see that CPMs are too high, another test to do is to roll out something that's smaller bottle options or lower price options because even a pricing test can inject more revenue into the business by increasing your conversion rate.

And then you get to a better net value than you would with just focusing on trying to increase the AOV and conversion rate in isolation. So when I'm looking at a new brand and I started evaluating their data, whether on meta or on YouTube, I'm looking at, know, what are they currently paying per click and what are all of the front end metrics? And, and then I'm running those, those formulas that I already cited here to see what exactly can they pay for a click and what's the Delta?

it negative or is it positive? And if it's positive, then we know that they're in a pretty good position to be able to push up. But oftentimes it's negative. And so what do we need to focus on first?

And so looking at what's the Delta to conversion rate or AOV to kind of industry benchmarks, we see across different verticals at our agency. And then from there, we can optimize toward each one, meaning do we need to increase this by 20 % and increase that by, you know, another 20%. What are the amount of lift that we need to get on each one of the levers to actually get? to a place that's sustainable.

Because if we just need a 10 % lift on both or a 20 % lift on one, one test can ⁓ drive that across the line. So I'm not saying here that if your allowable CPC is $1.50, but you're paying $2, that no amount of creative testing is going to save you. If you're just focused on creative or just focused on landing pages, yes, those things can impact those other metrics that I mentioned, specifically conversion rate and AOV.

⁓ but doing it for the purpose of driving down CPM, I think is the wrong test. And so to elaborate more around the creative testing piece is sometimes creative is gonna drive a higher conversion rate and a higher AOV. ⁓ We've definitely seen that multiple times where ⁓ a specific angle gets a higher conversion rate. And so if that impact is big enough across your account, well then, you know, that's gonna impact your allowable CPC as well because it's impacting conversion rate.

So creative testing is also a piece of this. but again, it goes back to conversion rate and not to focusing on CPM. So this is where I wanna dive in to kind of two different buckets that we deal with here. First, we have the first purchase profitable brands, and then secondly, we have the subscription brand.

And I wanna dive into this because the subscription brand angle is a little bit different. So let's start with the first purchase profitable brand. They usually have a high front end AOV of about $250. Like I said before, they're not really dependent on subscriptions.

pretty good at minimizing their returns. But this brand is really easy to see scaling opportunity from day one because when we calculate the AOV, or excuse me, when we calculate the allowable cost per click or ACPC ⁓ from their AOV and their conversion rates, it's pretty easy to see how that's gonna translate to scaling decisions. So this is where it gets more compelling for the brand operator that I'm talking to when. when they're looking at that number and it's, let's say, 30 cents under what they're currently paying or maybe more, it's really impactful.

It's not just, ⁓ I need five more dollars on my AOV. It's that I'm losing 30 cents on every click. And so that's a big problem. And on the other side of that, if it's 30 cents positive, they say, holy moly, OK, great, we're making money, but we obviously have room to scale because even if we pushed our CPC up to that ceiling, we'd still be making money because that's based on hitting target.

And so they really see that they're not pushing up high enough. ⁓ It very quickly clarifies that decisions need to be made about how to maximize the account to squeeze out the most revenue. Now to move on to the subscription brand problem. This one's a little bit more interesting because they have the low end or the low front end AOV and they're more reliant on subscription revenue breaking even at day 60, 90 or what have you.

and looking at that 12 month LTV for this specific channel in question. Let's just look at this. If the first order is, let's just say $35, and we were to say that their conversion rate is a 2 % and they have a target ROAS of 2, well, allowable cost per click is going to be 35 cents. But if we plug in LTV in the place of that front-end order value, then we're looking at a totally different number because let's say that LTV is, you know, 120, 80 or 240 over the specific time period that we're looking at to get to profitability.

We can use the same conversion rate and the same target ROAS and let's just say it's, you know, $180 at six months or whatever that time domain is that you use for your brand. that immediately translates into $1.80. So from 35 cents up to $1.

80 that you can afford to pay for a click because now you're looking at LTV based on your profitability and what you can expect the customer to pay with you. So that's really important to look at because for front end first purchase profitable brands, they've got that high OV so they know they're capturing that money immediately. Whereas you need to bake in the amount that you expect to. make off of a customer over that specific time period so that your formula is correct.

You need to be wary of using AOV if you're a subscription first brand and just plug in LTV because it's just not an apples to apples comparison when we're looking mostly at first purchase profitable brands with these large AOVs. So the next thing to mention there is that you really need to keep an eye on churn and things like that to make sure that that AOV is ⁓ holding steady. because if it's not and you start turning customers off more and that value starts to go down, you just need to recalculate your formula.

So we can kind of think about this in two ways. We have a cash ACPC and then we have an LTV based ACPC. cash ACPC is like the first purchase profitable brands. And then the LTV ACPC is those LTV based brands that are more subscription heavy and looking at those 9183 65 day values.

Now I really love the subscription side of it because it does give you more headroom. you do the calculation, you can see that your brand is able to run at a much more competitive ACPC or what you're able to max pay for a click. When using LTV versus your front end AOV and go back to the example I cited where we jumped from 35 cents off the calculation up to $1.80, I think anyone can agree that $1.

80 is a lot more competitive in an auction than 35 cents. Now you might be thinking, okay, well, that's all good and fine for the first person profitable brands, brands that cash ACPC looks like the easier way to measure this. But here's the thing. ⁓ If you refer back to an episode we previously did with Tyler Ryan, he showed a graph of direct response brands that actually don't recover what they lose.

I think it was like 30 or 60 day time period that their AOV went down by $24. And then their backend was only able to recuperate. about 19, so they were at $5 negative from their front-end AOV. So if they're using front-end OV in this formula, they actually might be assuming that their cost per click or allowable cost per click is higher than it really is.

And so I would actually challenge the cash ACPC to also use real LTV to give you a clearer picture of what you can pay for that customer. Because imagine if you, to cite another example he used in that is you have a really good phone team, you have a really good sales save, you're able to increase LTV, let's say on the backend by another $40. Well, if you bake in instead of that 250, you bake in 290 to the equation, well, then you're a lot more competitive in the auction. And that's what we're talking about because whoever can afford to pay the most for a customer is gonna win that auction.

Now, if you haven't checked it out already, I heavily recommend you go back and watch the episode with Tyler Ryan. He goes so deep on LTV and some of the granular aspects of LTV that I haven't heard many people talk about. So I highly suggest that for you so you can understand your LTV better, get thinking about the way he thinks about it, and then leverage the new number that you come up with for your LTV to plug back into this equation to understand your ACPC more effectively.

Starting there is how I'd stress test my LTV before plugging into this formula. I think that a lot of brands could be confusing themselves ⁓ leveraging AOV versus LTV. because if they don't know that they're actually growing at a larger rate than what they're losing on refunds, then you could be at a deficit that you're not even aware you have. So do that analysis by cohorts, do that analysis by products, definitely dive into the data and figure that out before moving forward.

So talking about all of this shouldn't be interpreted by any means as like a silver bullet to making scaling decisions. It's just one more data piece that I think helps qualify scaling decisions. So with that, I want to get into a little bit of the limitations about this framework. One example I want to cite is a brand that I worked with that was being plagued by really high CPMs.

I'm talking in excess of $150 and on some days $200. They were insane CPMs. So while ACPC can tell you what that volume ceiling is, in terms of what you can afford to pay, it won't tell you if inventory actually exists at that price. Meaning, are there really people that you can afford to pay $6 a click for?

Now, the interesting thing about this case is that we dove into their LTV and we figured out that they actually were able to pay about $4 a click because their LTV was so dialed. They had some really premium luxury products and they were able to afford that because their prices were at a higher price. But on some days, those clicks would get into the five or even to the $6 and then they were losing. On the other end, you might have a really low ACPC and then there might not even be inventory in that price.

Most people aren't able to get clicks for under 50 cents these days. It's pretty far and few between and there are very specific examples of when engagements or view throughs or whatever that you might be able to pull that off. but not on conversion campaigns, not very likely. But if they were that low, you probably don't even have inventory.

It's gonna struggle to find people and that's gonna start climbing quick. So again, if it's that low, you need to focus on those other levers to increase what the allowable is. Because again, that 35 cent example, there's no inventory at 35 cents. Nobody's scaling at 35 cents.

So you're probably paying close to a dollar for it. Let's just assume they're paying 75 cents, but their allowable is 35. Well, they're losing 40 cents on every click and they need to figure out a way to be more competitive to get that allowable CPC closer to a dollar. The other thing to mention is just economies of scale, scale degradation to be specific.

So as you scale up, CVR is probably going to come down. AOV might be impacted because you're going out to broader audiences. If you're not already spending into the fives and six figures a day. then you're probably not seeing the kind of stability at scale that you would expect for your CVR and AOV.

So definitely as you push up from the low to mid and upper four figures, you are gonna be seeing more fluctuations in the CVR and AOV. Once you're into those upper fives and even six figures a day, you'll probably experience a lot more stability in those CVR and AOVs because you're already at a really big broad audience. But for those lower spend numbers, the variance of that CVR and AOV are gonna impact your allowables day over day. So you definitely want to make sure you're measuring that on a long enough look back window and not on like a seasonal period where you had a boost or a low seasonal period where everything kind of looked crappy.

You want to be able to make sure you're looking at something that seems stable and accurate to a benchmark that you can hold your account to in general. So that means, yes, you are going to want to update this calculation and keep track of it over time. We do a monthly analysis of what the top end metrics were for all of our accounts. At the end of the month, we look at that stack of data points and we calculate what the allowable CPC is so we can keep track of the delta.

How close were we to it? Did we leave money on the table for the client, meaning we had a positive delta there or was there a negative and we're always trying to get right on the money of what allowable CPC is. So allowable CPC doesn't tell you if you can scale. Allowable CPC just tells you if scaling is worth it.

It tells you what has to be true in order for you to hit the gas. So here's the tactical takeaway if you wanna run this for yourselves. I would pull your real CPC data from whatever platform you want from the last 30 days, either Meta or Google, and use that as your baseline. And then calculate your ACPC using the ROAS-based formula.

I prefer the ROAS-based formula. Or if you're a CPA-based brand, use the CPA formula again. The ROAS version is AOV times CVR divided by your target ROAS. And then the CPA is just your target CPA times your conversion rate.

Use those formulas to establish what your allowable CPC is and compare that to your baseline that you pulled from your platform data of your past 30. Now, quick reminder that if you are a subscription heavy brand, considering using your LTV and understand what that ⁓ profitability metric is for you, whether it's 90 days or 180 days, depending on your business, we typically look at a 90 day window and so what's that 90 day LTV and then we use that number in there instead of AOV just to keep the calculation more competitive for the auction.

Then as you look at those two numbers and you compare that gap, are you negative or are you positive? And that's really where you start. And instead of trying to drive down your CPC by focusing on CPM, you can prioritize whether or not you need to focus on CVR or AOV. Based on what a benchmark would be, and I think that's where we have the advantage of seeing across multiple accounts, that finding the benchmark for what your CVR should be and what your AOV should be.

And if you have that data from around the industry, from your network or from buddies or whatever, definitely compare those and see what's the higher lift. Are you $20 under on your AOV and maybe only let's say two percentage points or two tenths of a percentage point off right on your conversion rate, you probably want to focus more on your AOV than on your conversion rate because your conversion rate is pretty close. ⁓ Point being there is just like focus on the highest leverage thing first and hammer that instead of trying to go off something like CPM, which isn't 100 % in your control.

So basically what you're doing there is just modeling a couple scenarios on like when the numbers move up, when the numbers move down, how does it affect our allowable to either if you're at a negative, get you where you need to be. or if you're already at a positive, but you're getting pretty close to closing that gap, you can push it up even higher so that you can scale even more. So really what we're trying to do here is stop asking like, is our row as good? Is our row as enough?

And get a little bit more granular, think about it a different way, reframe it. And so you can actually focus on what are those independent livers that we can hammer on to make sure that we're giving a lift to what we can afford to pay for a click. So you're getting more competitive in the market so that you're able to convert more people and make them more valuable to your company. So this isn't necessarily a new metric.

So there's a number of ways to look at how you evaluate the decisions or make decisions about scaling. And this is just one more way to understand how much room you actually have for your cost per click in the auction. And I'd argue that most brands don't look at it this way. From my experience, talking with operators, CMOs and founders, they just don't look at this at all.

It has brought a lot of value to our team. It's brought a lot of value to the decisions about which brands we bring on. ⁓ because it gives us a really clear framing for how far off a brand is from actually being able to make scaling decisions. Overall, the formula is really simple.

The inputs are really simple, but again, your output is only gonna be as honest as the inputs you give it. So that's it for today's episode, a pretty quick one. We have our full funnel sheet, the way that we evaluate funnels and front-end ad metrics for all brands. Within that sheet, there is an allowable CPC calculator.

We'll go ahead and leave a link to that in the description so that you can grab it and fill it out if you want. Play with the ACPC calculator. If you're watching on YouTube and you've got a comment for us, drop it below. We respond to all of those.

Also, if you're listening on either Apple Podcasts Spotify, please consider leaving us a review and subscribing there. Follow along wherever you're listening. On that note, it's great to have you here. That's it for today.

I'll see you in the next one.