Let’s start with knowing your numbers and the most important metrics you need to know in order to grow your business.
If you’ve been working in the agency in the past or you have been following all of the BS content out there on youtube (there’s a lot of it) you probably think that ROAS is the most important metric

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Well, that’s wrong…

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Let us explain why:

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Viewing your business solely through the lens of ROAS is like judging the success of a marathon runner by how fast they sprint the first 100 meters. Sure, a quick burst of speed might look impressive at the start, but it doesn't necessarily reflect the runner's ability to maintain pace over the entire race.
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On the other hand, focusing on PSM (profitable scaling margin) is akin to training for the marathon itself. You're not just concerned with how fast you start; you're also considering factors like endurance, stamina, and overall performance throughout the entire race. In e-commerce terms, this means looking beyond immediate returns from ad spend and instead prioritizing the long-term value of each customer.
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With PSM, you're not just chasing short-lived spikes in revenue; you're building a sustainable business model that prioritizes customer lifetime value, repeat purchases, and overall profitability. It's like investing in a training regimen that improves your endurance and ensures consistent performance over the long haul.
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In essence, while ROAS might provide a snapshot of short-term success, PSM offers a more comprehensive view of your e-commerce business's performance, guiding strategic decisions that lead to sustained growth and profitability in the competitive market landscape.

Here’s how to calculate PSM:

PSM, or profitable scaling margin, is calculated using the following formula:

PSM / LTV + (CPA + COGS) x Number of purchases on average for the average customer based on that initial product that they bought.

Or in another wayWhat is the average customer worth (total value) / How much does it cost to make each sale (total net blended) + how much does it cost to make each product (total net blended) x How many purchases will they make against that initial product offering.

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LTV stands for lifetime value of a customer.

CPA represents the cost per acquisition of a customer.

COGS denotes the cost of goods sold.

The average number of purchases refers to the average number of transactions a customer makes over their lifetime.

Other very important metrics that you need to know in order to grow your business are:

NC-CPA (New customer cost per acquisition)

Second Purchase Rate (Average time of when the second purchase occurs)

LTV - Lifetime value of a customer 30,60 and 90 days (as previously stated)

AOV - Average order Value