Last Updated on July 19, 2020 by Justin Clifton
Digital marketing clients fall into one of two main categories: ecommerce and lead generation (lead gen). The goal of any ecommerce store is to sell products for a profit. The goal of any lead generation site is to get visitors to reach out to the business via a form submission, a phone call, an email, a chat session, etc. Ultimately, the end goal for any business is always making money. As they say, it’s all about the bottom line. In this article, I want to go over the basic differences between ecommerce clients and lead gen clients. I’ll also go over why you might want to do work for both types of clients or specialize in one over the other.
Lead Generation
Lead gen sites are often selling customizable products/services which can’t be directly sold online for a set price. Some degree of communication needs to occur between the business and the potential customer before an actual sale can be made. Due to this fact, there’s inevitably a delay between the lead generation event and any potential lead closure (the customer committing to doing business with the company). So how do you calculate profitability on ad spend in this case? There are a few main ways to approach this:
1) Determining average value per lead
Perhaps the company you’re working with has a lot of historical data. And they know that for every 10 leads they get, an average of 2 leads close and generate $10,000 in revenue on average. That would mean that every lead generation event (not every lead closure event) is worth around $1,000 each. So when you’re setting up conversion tracking for leads coming in, you can assign a static value of $1,000 for each event. One major drawback of this approach is that avg. values can vary significantly, especially if a company’s business varies by seasonality or other factors. What if the company gets 15 leads one month and only 1 lead gets closed for $5,000? Well, now the value per lead is actually $333 but all 15 of these lead gen events were reported as having a value of $1,000 each. This is a simple low maintenance solution which can be quickly setup for ballpark numbers. It is better than nothing, but it certainly has issues over long periods of time
2) Importing offline lead closure values
This is my preferred method for working with lead gen clients. It is more complex to setup, but you’ll be able to get very accurate revenue numbers to feed into your ad platforms. Every major ad platform has unique click IDs that it associates with any ad clicks. Google has the GCLID (Google click ID). Microsoft has the MSCLKID (Microsoft click ID). So on and so forth. With the right web analytics setup, you’ll be able to associate those unique click IDs with leads that come in from calls, form submissions, etc. And ideally you’re working with a well organized business that is using a CRM (customer relationship management) to manage any leads received by the business. Assuming your web analytics setup is working properly, people on the sales side will be able to see the names of leads and the unique click ids that brought the lead to the site. Then in the ad platforms, you’ll need to have conversion events for both online lead gen events and offline lead closure events. When any particular lead closes, you can import that event as an offline conversion with the exact conversion value from the offline deal. Admittedly, this approach is a bit technical, and I can’t go into all the details of how to implement this approach here in this article. But rest assured, it’s definitely possible to pull this off. And interestingly, many of the lead clients I work with are totally unaware of this possibility.
Every business out there is looking to generate new business somehow. For many businesses, lead generation is specifically how they connect with new customers and grow. Anyone that can effectively and consistently generate leads for other businesses has enormous potential for making a lot of money. If you set your pricing right, you can grow with the business itself.
Ecommerce
Ecommerce stores are conducting transactions directly on the web. Since everything occurs online, tracking that revenue and feeding it into various analytics and ad platforms with minimal delay is pretty straightforward. Now of course, setting up conversion tracking for events with dynamic values (like a purchase event) is more complex than setting up conversion tracking for a lead gen event that has no value at the time of conversion. But the point stands that with a proper web analytics setup, you can track the progress and success of an ecommerce store with great detail. Many stores get their start by running ads on Google Ads, Microsoft Ads, Facebook Ads, etc. If you’re running ads to an ecommerce store, one metric that will be incredibly important to keep an eye on is called ROAS (Return On Ad Spend). This metric is expressed as a number or a percentage (e.g. 234% or 2.34)
At the end of the day, the formula below needs to be true for an ecommerce store to be profitable:
COGS (cost of goods sold) + ad spend + transaction fees + shipping (if paid by seller) + taxes (if paid by seller) < revenue
So if all of the input costs for a sale are less than the output revenue from that sale, the store just turned a profit on that sale. The ROAS metric just gives you a quick snapshot of what’s going on with two variable numbers in that formula by giving you the value of revenue over ad spend. The minimum ROAS needed to turn a profit will vary depending on the COGS for any given product. The better your margins, the lower your minimum ROAS can be. Let’s look at a simple example to see what the minimum ROAS would need to be for a single product which is sold on the site for $25.
$25 price with $10 COGS.
Product Margin = (25 – 10) / 25 = 60%
$25 – $10 = $15 profit
Max profitable CPA (Cost Per Acquisition) is $15
Rev / profit = min profitable ROAS
25 / 15 = 1.66 = 166% min profitable ROAS
Now let’s do the math with worse margins to see how the minimum ROAS increases.
$25 price with $20 COGS.
Product Margin = (25 – 20) / 25 = 20%
$25 – $20 = $5 profit
Max profitable CPA (Cost Per Acquisition) is $5
Rev / profit = min profitable ROAS
25 / 5 = 5 = 500% min profitable ROAS
So as you can see in the bottom example, when the product margins are razor thin, there’s barely any room for ad spend. You’d have to spend less than $5 on ads for every sale of this particular product. For this reason, I only run ads for stores that have solid margins. If a store has low profit margins across the board, I know right off the bat it’ll be hard to make that store profitable with ads.
Campaigns types that are used for lead gen clients can also be used for ecommerce clients. However, the economics of certain campaign types don’t always make sense. But on the other hand ecommerce has campaign types that cannot be used by lead gen business. A prominent example of this is the shopping campaign type found in Google Ads and Microsoft Ads. You can only run these types of ads if you’re directly selling specific products on your site.
Lead Gen vs. Ecommerce
There are people in digital marketing that exclusively work with lead gen clients and there are people that exclusively work with ecommerce clients. Both have their pros and cons. One isn’t necessarily better than the other. It is mainly a matter of personal preference. I happen to work with both although I have been gravitating more towards ecommerce over the past year. Personally, I love all of the math and formulas related to doing ecommerce work. For others, I know this could be off-putting. While the barrier to entry with ecommerce clients is bit higher with more complex web analytics and more complex campaign setups, the big upside in my opinion is that you get almost immediate feedback on whether or not your advertising campaigns are profitable and effective. It’s very objective. Either your ads are meeting your targets for profitability or they’re not. For lead gen, the cycle time from lead gen to an actual sale can take a long time. It could be months between a lead being generated and a lead committing to actually pay for a service. So sometimes you’re forced to just optimize based upon lead generation as opposed to lead closure, regardless of how good those generated leads are in reality.
So whether you want to work with service based businesses or help grow ecommerce stores, I hope you learned more about both client types by going through this article. If you’d like to learn more about digital marketing, then check out my other articles and my premium courses. And if you need help or coaching for anything related to digital marketing, then feel free to contact me.
