Why you should never maximize for first day profitability

Let’s talk about the trap of maximizing for first day profitability. What I mean by this is, a dollar spent needs to be profitable on the day it was spent. Pursuing first day profitability happens when either top line revenue is declining or contribution margin percentage is shrinking (or both). What first day profitability doesn’t take into account is the retention revenue and contribution margin trade-off. It’s also an incorrect and simplified view of how performance marketing actually works. It’s a dangerous and short-sighted view that C-suite executives take who want to appear like they have a strategy.

This view fundamentally misunderstands how performance marketing works. I’ll use an example. Let’s say it’s September 1 and I set my Google Shopping target ROAS to 5x and set my daily budget to $100.  What I'm telling Google is that Google needs to deliver $500 in revenue on that $100 of ad spend.  Google will try to get that return, but it will do so with these parameters:

• Google has a rolling 30 days, spending $100 per day, to hit a 5x return for that September 1st spend

• Google can spend 20% over the rolling 30 day daily budget average without penalty

In the ideal world, on September 30 we would have spent $3,000 and gotten $15,000 in return. But in the real world, there are a range of results like:

• Google spends 20% more than the rolling 30 day daily budget because it included a Labor Day Sale budget increase, bringing the ad spend to $4,500

• Google doesn’t hit the 5x ROAS because Google assumes your conversion ratio is constant and builds an estimate of the anticipated revenue for each click

• Google hits the 5x ROAS for some days in September, but hasn't hit 5x ROAS yet for the September 16-30 paid clicks because it hasn't been 30 days yet for that spend to fully attribute

Your end of month report could look something like this:

Max CM = Maximizing contribution margin

Here’s what the C-suite execs are thinking when they see the end of month report:

“How can we spend less and make more contribution margin?”

“That additional $600 is unprofitable.” 

“We shouldn't be spending that additional $600.” 

The only problem is, marketing doesn't work like that. Google doesn't work like that. Daily marketing spend and daily ROAS results are not correlated perfectly.  There is unprofitable spend happening every day, regardless of one's target ROAS. To say that the $600 spend is unprofitable means to say that you can identify on what clicks on what days of the month did not generate a 5x ROAS after 30 days of purchase. And you can do so on October 1 even though the only day that meets Google's criteria for full attribution is September 1st.

Either you believe the spend behaves like this, and thus we should not spend any advertising dollars for 6 days in September.

Or you believe the spend behaves like this, and it's harder to determine which dollar was spent on which profitable click or unprofitable click.

At the end of a rolling 30 day period, that first day's spend will most likely get to the desired ROAS. But it doesn't have to. Google can over-spend if it thinks we can get more revenue. Ultimately, it is incorrect to view that at the end of a period, X amount of spend did not produce incremental revenue. And that is because spend that adds incremental revenue does not do so in a linearly fashion. It's not at all true that the last $600 spent was the unprofitable share of the total spend.

Put it another way...

This view computes ad spend wrong. We are not spending on the ads that actually resulted in the conversion. Again, an example. Let's say that we spent $100 on September 1st on Facebook and generated 0 orders on September 1st. Then we spend $400 on September 2nd and generate 100 conversions on September 2nd. But no one who converted on September 2nd saw/clicked the ad from September 2nd, rather they saw/clicked the ad from September 1st. On a daily report, it would look like this:

And we would think that the spend on September 1 was unprofitable. And we would be wrong.  Because in Facebook, all conversions are back-attributed to the day of ad delivery, not the day of conversion. As mentioned in the previous example:

• Facebook anchors its default 30 day or 7 day attribution window on ad delivery instead of the occurrence of a conversion.

• Facebook Ads data is designed to answer one question: "how many conversions has the given ad generated?"

• With an X-day attribution window, any conversion that happens before the end of the window will be attributed to our first ads regardless of whatever happens after the ad is served.

• Meaning that if a customer makes a purchase within the X-day window, the ad they clicked on or viewed first will take credit for that conversion, regardless of whether the reason for the purchase is from another channel. 

Simply put, not all conversions we see in our ad platforms on any given day are attributed to the ad spend of that day.