Module 2
Understanding Numbers
In this video, I wanted to go through and give you a really quick
understanding of the high-level numbers that are involved in a
business.
To start off with the net profit and the ROI.
The net profit is essentially the sales, or the sale of the product, minus
the cost of the product minus the ad cost. In this example, we've got a
levitating moon lamp that we can sell on our store at $100 for example.
Now we find this same product on AliExpress for $35 and it costs us
$35 in ad spend to sell one of these products.
Our net profit for that entire transaction is $100, which is a product
sales price, which is how much we've earned from the product sale
minus how much it cost us to buy the product minus how much it cost
us to run the ads.
$100-$35-$35 equals $30 so our net profit in this example is $30.
Now you may hear the term ROI or return on investment. Essentially,
that means the net profit divided by the total investment costs.
In our case here, our net profit was $30 and the product cost is #35
from AliExpress and $30 from Google Ads, so that’s $70. The ROI is
usually expressed as a percentage, so it's $30 divided into $70, which is
43%.
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That's fairly typical. Anywhere between 20% and 30% is perfectly
normal for this type of business that we're doing here. That's how we
calculate net profit.
Now we have the ROAS. The ROAS is simply the return on your ad
spend.
To calculate that, we have our product selling price and we just divide
the ad cost.
In this case, we've got $100 as our product selling price, and our ad
cost was $35 so to get the ROAS, it's just $100 divided by $35, which
equals 2.8.
A lot of the time, you see the ROAS as a percentage. Just times it by
100, it'll convert it into a percentage or 280%. Either one, it's perfectly
fine.
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The last thing that I want to go through, which is we're going to be
talking about this a lot when we go through and talk about product
selection and what and all that, is the breakeven ROAS.
This is really good to know to understand how much your breakeven
point is.
The breakeven ROAS is calculated by looking at the product selling
price, and then you just divide that by the profit that you make by
selling it.
Let's go through an example here. Going back to our moon lamp
example, we're selling this product at $100 and we need to buy it for
$35 so $100 minus $35 is $65. That's our profit margin for this.
Now all we do to work out the break even ROAS is go $100 divided by
$65 and the break even ROAS is 1.5, which is perfect for what we want
in this scenario.
Keep that in mind when we're going through doing our advertising
and Google ads, there is a column for the ROAS, and it's a really good
idea to know where our breakeven point is so we know whether we're
making money or not.
I want to give you here just to come up with some pricing guidelines.
These are guidelines. Use the other variables that you get given in the
product research sheet to validate them.
Goal: Breakeven ROAS 1.5 or less
➢ $10 - $50 Product Cost, then 3x-4x
➢ $50 - $100 Product Cost, then 2.5x - 3x
➢ $100+ Product Cost, then 2x
Depends on perceived value!
Eg: Product costs $30, sell for between $90- $120
These are just guidelines. The goal really is to have a breakeven ROAS
of 1.5 or less or around that.
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For example, the way you would achieve that is for anything between
$10 and $50 from a product cost, then you should be able to increase
the price by three or four times.
That's just a general guideline to get that right. Same thing for
products between $50 and $100. Then you can probably 2.5 times
them, or between 2.5 and 3.
For anything over $100, you could just go. Double their cost there.
Now this all depends on the perceived value, of course, so you have to
do your other research and find out what other people are selling it for
and all that type of thing.
This is just a guideline to help you come up with how much to price
your product at.
For example, if our product costs $30, then you could sell it for
anywhere between 90 and $120 and your ROAS will be fine.
Now just remember to use the product research sheet that we gave
you here, and this will calculate the break-even ROAS, and it does turn
green when it's under 1.5 so that's a really good indication.
To get the selling price, you really want to make sure that you do go
out there and just see what your competitors are selling it for and base
your price around that. That is a good guideline to follow.
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