Ads are essential tools for driving traffic and sales for eCommerce businesses.
It’s commonly believed that higher ad spend will automatically lead to higher conversion rates — after all, you’re capturing more leads and turning these clicks into customers.
However, it is important to note that while higher ad budgets can indeed fuel better audience targeting and more sophisticated campaigns, it's not as simple as "spend more, earn more."
The real challenge lies in finding the sweet spot of profits between ad spends and conversion rates.
When High Ad Spend With a High Conversion Rate is a Good Thing
It is sometimes worthwhile trying to spend more on advertising, given that it can lead to better conversion rates. Here’s the strategy for when this makes sense:
High Return on Investment (ROI)
When your conversion rates are high enough to offset increased ad costs, you're in a sweet spot.
For example, if someone spends $1,000 a day on ads and gets a conversion rate of 5% (this is achievable considering the industry benchmark is 1-2% for the eCommerce sector) one can argue that it is a reasonable amount to spend on advertisements and profits would still be healthy.
Low Cost Per Acquisition (CPA)
Integrating strong marketing and advertising strategies will mean that a higher conversion rate will inevitably lead to a lower Cost Per Acquisition rate. This applies if ads are converting efficiently as each dollar spent becomes more valuable.
Think of it this way: if you're spending $1,000 to acquire 50 customers instead of 20, your CPA drops significantly, making your higher ad spend more justifiable.
Quality Traffic and Better Targeting
Higher ad spend often gives brands access to premium placements and better targeting options.
When combined with high conversion rates, this indicates you're not just reaching more people – you're reaching the right people.
This efficiency in targeting can justify the increased spending, especially when it translates to qualified leads and loyal customers.
When High Ad Spend with High Conversion Rate Becomes a Problem
High conversion rates usually encourage eCommerce brands to spend more on ads. But there are certain instances in which this sweet union can be a bad omen for one’s business growth:
Diminishing Returns on Profitability
Even with impressive conversion rates, a high ad spend can actually cut into your profitability.
As ad costs rise, each customer becomes more expensive to acquire.
For example, spending $5,000 on ads to achieve a 4% conversion rate may seem like a win. But if each sale only brings in $20 in profit—down from a usual $40—you’re actually losing money on every sale.
High conversion rates can create an illusion of success, while rising ad costs eat away at the actual profit per sale - the revenue generated stops to justify the investment made.
Non-Linear Scaling Issues
A frequent error made by many eCommerce advertisers is predicting that the number of conversions will double if the cost increases by two times. In most cases, things do not fit that specific mold.
Raising a 1K daily ad spend to two does not always increase sales. Many times, when projected figures are lower, it’s probable that conversion rates could fall. The increased cost per conversion generally summarizes the whole situation perfectly. Non-linear associations may suggest you have already exhausted your most valuable market segments.
Market Saturation Signs
A high ad spend with a high return may mean that you are aggressively reaching a small target audience. Although the short-term outcomes appear satisfactory, you might be:
Depleting the most lucrative segments of the customer base
Bidding against yourself in ad bid competitions
Paying premium prices for diminishing returns on each additional conversion
Strategies to balance Ad Spend with Conversion Rates
Here are some ways to balance your ad spends with conversions:
Optimizing campaigns with data-driven decisions
As recent research shows, businesses that use data-driven marketing are six times more likely to be profitable from year to year. The solution lies in identifying and studying the correct metrics:
Customer acquisition costs across channels
Revenue per customer segment
Campaign performance by time and platform
Attribution modeling insights
ROI by marketing channel
Platforms like Graas make accessing, analyzing, and leveraging such data easier than ever before. With Graas, you can:
Gain a complete view of your eCommerce business in one glance.
Fully customizable drag-and-drop dashboards.
Simplified eCommerce marketing analytics across platforms & channels for your team.
A/B testing
Implement systematic testing to optimize your spending:
Test ad creatives and copy variations
Experiment with different audience segments
Compare bidding strategies
Evaluate landing page elements
Track performance across different times and days
Keep tests focused and sequential to clearly understand what drives improvements in both conversion rates and cost efficiency.
Diversifying marketing channels
Modern online shopping journeys are not linear. Today's shoppers interact with brands across numerous channels before buying.
The customer may, for example, see a social media advertisement, go to the website, get a retargeting advertisement via email, read product reviews, and inquire on price comparison sites before buying the product.
You can use data to improve the performance of your marketing activities.
You know what you wish to achieve - increasing the number of conversions in this case – and therefore you know how to change the messaging, the timing, and the channel selection accordingly.
For instance, your attribution model reports that customers with no less than three interactions on different brand channels before making a purchase tend to have a 50% increase in average order value. With this insight, you could plan to launch a campaign on multiple channels to create more interactions resulting in higher net value for the business.
Besides, when you use Graas, with Attribution Analytics, you can quite easily pinpoint underperforming channels or campaigns. For example, if you discover that a specific ad set or email funnel does not convert well, you can drop it and cut costs to support other efficient means, efforts, and resources.
Forecasting the ROI of ad spends on conversions and profits
The days of relying on gut instinct or anecdotal evidence to guide marketing decisions are quickly fading. Predictive analytics has allowed eCommerce businesses to convert raw data into actionable insights that drive smarter, more strategic resource allocation.
Let’s say you’re running parallel marketing campaigns for the same product on Facebook and Google Ads. Rather than arbitrarily dividing the budget between the two channels, you can use predictive analytics to forecast the likely return on investment (ROI) for each campaign.
By analyzing historical data on ad performance, customer engagement, and conversion rates, the predictive models can identify the platform that is statistically more likely to generate the highest revenue.
Identifying optimal spend
Thanks to modern, complex algorithms, brands can now evaluate previous ad expenditures and understand the exact amount that maximizes the returns on ad spend (ROAS).
These systems assess performance levels for a range of budgets and help in finding the budget where return on investment begins to diminish. By incorporating seasonal trends into these predictions, businesses can adjust their spending strategies well in advance, ensuring they're always investing at optimal levels.
Adjusting in real-time for efficient spending
With eCommerce analytics platforms like Graas, you can continuously track performance metrics and make instantaneous adjustments to bidding strategies based on live conversion probability data.
This approach allows you to capitalize on high-performing windows of opportunity as they emerge, rather than discovering them in hindsight.
Boost your ad conversions with Graas
AI-powered marketing tools like Graas' Marketing Deep Dive are like your personal marketing assistant. They keep a close eye on campaign performance and swiftly adapt to market shifts in real-time.
Using AI, it can help you optimize ad spends, comprehend ad interactions, predict purchase patterns, forecast sales trends and improve conversion rates.
With these insights, Graas ensures that your inventory isn't just aligned with demand but anticipates customer preferences in real-time.