Last year, everything changed. Is this the “new normal”? Will things go back to the way they were? Or is there more change to come?
Change is, in fact, the only certainty. Since the world’s emergence from COVID-19 hasn’t gone nearly as smoothly as hoped, I’m betting that there are more rough waters ahead during the rapidly approaching holiday season for those of us in PPC.
Everyone used to know what was going to happen during the holidays. Q4 is when retailers make and surpass their sales targets. Black Friday and Cyber Monday will be huge. But since last year, such truths have been fraying at the edges.
What’s changed? Because of the greater unpredictability of supply chains, consumers are doing their holiday shopping earlier than ever, when more items will be in stock. But that’s not news since it happened last year. Discounts won’t be as sizable as they used to be, but that’s not news, either.
What is news? I believe that mathematically based predictions, grounded in solid figures such as manufacturing and shipping costs, are more likely to yield new information and insights than retrospective trend-watching.
I’ll walk you through an example below. While my numbers are based in reality, they will vary from one company to another so use them to understand the way a hypothetical retailer might think about how much they can spend on digital marketing.
Shipping Costs & The Retailer’s Dilemma
By now, retailers have long since placed orders for the holidays. Because of supply-chain disruptions, they’re probably spending more in manufacturing and raw material costs than before. An order that cost $40,000 last year may cost $50,000 now.
Then they’ve got to ship those goods in a container from their point of origin, probably China, across the ocean to wherever their warehouses are located.
Here’s where retailers are really feeling the pinch.
Shipping costs are calculated per container rather than by container weight. You may have shipped your $40,000 worth of goods for $4000 last year. This year the shipping cost per container has more than quintupled to over $20,000.
I personally know someone who’s paying closer to $25,000 per container as of late September. Ouch!
Shipping costs have gone through the roof for a number of reasons, including COVID-related port closures and such macroeconomic factors as ongoing supply and demand imbalances. Industry analysts see no relief in sight before 2023.
What’s a retailer to do? Should they:
- Raise prices and risk losing customers?
- Keep prices steady, make less profit, and anger shareholders and investors?
- Discount less, as was done last year, to protect already thin margins?
Let’s go back to the math. If the goods are marked up a typical 200%, what retailed for $80,000 last year cost $44,000 ($40,000 for the goods; $4000 for shipping), leaving a profit of $36,000.
This year, retailers could raise prices, for example 10%, so the goods now retail for $88,000, but costs have gone up even more to $75,000 ($50,000 for goods and as high as $25,000 for shipping), leaving a profit of only $13,000.
The cost of doing business is threatening to put retailers out of business.
There’s another option for raising margins. Unfortunately, it’s to spend less on advertising, particularly PPC advertising. It’s likely that retailers will attempt to pass some of their losses on to their agencies. That means you.
Let’s look at this more closely.
Bending Over Backwards
One of the things that makes PPC advertising so amazing is its flexibility. You choose a budget, write a message, select keywords, and pick a bid or target. All this can be changed easily and as often as you like.
But especially when the world is in upheaval, certain advantages can become disadvantages. With other options off the table, your client might ask you to dial down bids or set a more aggressive tROAS.
The simple formula for calculating breakeven tROAS is 1 divided by the margin expressed as a percentage. Based on my example from before, last year, there was $36,000 of profit—a 45 percent margin—to work with when buying ads. Dividing 1/45% yields a breakeven ROAS of 222 percent.
In other words, you can spend $1 on ads for goods that cost $1.22 to manufacture and ship, sell those goods for $2.22, and break even.
This year is very different. Your $13,000 margin is only 26 percent, which means you need a ROAS of 385 percent (1/26%) to break even. In other words, to break even you can only spend $1 on ads to sell $3.85 worth of goods that cost you $2.85 to manufacture and ship.
Going from a tROAS of 222% to 385% may cause low-ball auction bids that will probably assure that your ads will no longer appear on the first—or even the second— page of results.
This will be a challenge, especially if your brand competes with a better known brand that is able to raise its prices more or that has better pricing power with freight lines.
But while I can’t predict what your retailer clients will do, it seems wise to be ready for when they ask that their PPC campaigns bear at least some of the new cost of doing business.
At Optmyzr, we have always advocated multiple PPC campaigns, each with their own targets based on the profitability of different product categories. Not all products are created equal. It looks like the product mix will be quite different this year, and our usual advice is more pertinent than ever.
Shipping costs, again, are calculated on a per container basis, not on how much the container weighs. This year shipping a 40-foot container may cost $25,000, whether that container holds artificial Christmas trees or decorative string lights.
But you can fit a lot more string lights than Christmas trees into the same-sized container.
Let’s say 200 artificial trees are the same volume as 48,000 boxes of lights (based on me measuring the size of my own holiday decor). If a Christmas tree retails for $195, sales of the 200 trees will yield $39,000. If a box of ornaments retails for $10, sales of the 48,000 boxes will yield $480,000.
Let’s look at shipping costs again. The $21,000 in additional shipping costs is about 54 percent of the $39,000 of revenue from the sale of trees. For the ornaments, the increase is 4% of revenue, which is clearly much easier to absorb when setting the new tROAS bids your clients will probably be demanding.
Retailers will de-prioritize items with a low potential revenue per volume and vice versa, So, there will be more lights but fewer trees to hang them on.
Those string lights can still be marketed through PPC more easily because the tROAS doesn’t need to change drastically to preserve profits. Whereas for trees, the change in tROAS required to stay even might be too drastic, shocking the Google Ads system and tanking your sales volume.
The important point to take away here is not about trees or lights, but rather that a metric like ‘price per volume’ — something we typically don’t think about in PPC — may actually have a big impact on what we’re tasked with advertising this year.
Acquiring New Customers
It’s likely that the downstream effects on conquesting, or acquiring new customers, will be significant. I may prefer Target to Walmart. But if Walmart has artificial Christmas trees and Target doesn’t, and I need a tree, I’ll overcome my prejudice and start shopping at Walmart.
If Walmart has a product others don’t, there’s far less need to discount it. Availability will be the key to sales. Guaranteed home delivery and Buy Online Pickup in Store (BOPIS) services, rather than pricing, are the value-adds that will help win the game.
The holidays this year are going to be even more different than last year. The effects of much higher shipping costs are going to be significant and ripple throughout the retail ecosystem.
Forewarned, however, is forearmed. Taking account of these factors will help PPC agencies and professionals mitigate the effects of increasingly unpredictable markets.