Market experiments
In our company and in the companies of our clients, over the last few years, we have learned to “adjust products to customers” – look for a product-market fit. That is, in a certain market situation, place an advertisement in the reception environment and profitably acquire customers and then sell them.
Now we need to do the same, not in a matter of months – years, but in a week or preferably a day
- In most companies, the only way to survive is to quickly adjust the offer and/or the method of acquiring customers to market requirements. Especially where sales decreased drastically.
- Additionally, since we assume the economy will not recover quickly, we need to be very cost-effective. With the smallest possible expenditure of funds, we have to learn whether a new idea for running a business model, will generate profits or not.
- Customers set entirely new requirements for us and as the only company on the market, we can conduct a market experiment within a few days. They are interested in finding the answer to the question of which product range (current or future) is selling the best now. What to invest in now and what to invest in soon?
When are you doing experiments and calculating ROAS?
ROAS is calculated to know if an investment in a given product makes sense or not. If the ROAS coefficient is greater than 1, it means that we have a chance to make big profits.
Example of steps that a company can take to conduct an experiment:
- A company (IT or any other) wants to increase its profits for two reasons: it has lost a lot recently, or it thinks it can.
- On-line services are in great demand (people sit at home and boredom browse Facebook).
- The company’s key employees decide to launch a new product on the market – online.
- They don’t know if the new product will catch on. So they set a certain minimum budget for conducting a market experiment ($2,000).
- In the next step, they define a new product/service (name it, define what problem it solves and what is unique about it), create a new website, and buy traffic from paid advertising (where you pay depending on the number of visits to the website).
- They make what is the ROAS indicator that answers the question of whether it is worth investing in this product or not?
ROAS indicator is the most effective measure of success in lauching a new product.
ROAS – Return on Ad Spend – Return on advertising investment
Calculated as profit from the sale of a product/service in relation to the expenditure incurred.
A simple calculation (in which we do not take into account the expenses for preparing the website, and we treat the product as price = profit + costs):
- By spending $1,000 on advertising, we make 2,000 people visit our website, of which we sell 6 products on each we earn $200.
Which gives us:
- Advertising cost = $1,000,
- Profit = 6 * $200 = $1,200,
- ROAS = 1,200 / 1,000 = 1.2.
ROAS = 1.2 means that by investing $1, we earn $1.20
