Two Things E-commerce Startups Must Understand About Social Media Ads

Launching an e-commerce store is an exciting venture, but navigating the world of online advertising, especially with a limited budget, can feel daunting.

Many startups, are eager to leverage platforms like Instagram and TikTok for growth. While social media ads are powerful, it’s crucial for new e-commerce businesses to understand their role, particularly in the initial phases, and how they differ from other channels like Google Ads.

Let’s break down two critical insights for e-commerce startups considering social media advertising:

1. Understanding CACs for Start Ups
2. Understanding Returns while Testing and Optimizing

1. Understanding Your Cost Per Sale: The Reality for Startups

Every e-commerce business owner dreams of a low Cost Per Sale (CPS), the ultimate metric for profitability.

However, predicting an exact CPS in the startup phase is like having a crystal ball – it’s impossible without baseline data. And crucially, relying on broad “industry averages” can be deeply misleading, primarily because of one massive factor: branding.

Let’s illustrate this with two contrasting examples.

Example A: NoNameClothing (NNC) – The Pure E-commerce Startup Play

Imagine “NoNameClothing” (NNC), a brand that just launched. They have a small collection, minimal social media followers, and virtually no existing brand awareness or trust.

NNC decides to jump straight into direct-response ads, pouring $10,000 into campaigns. From this, they generate $1,000 in revenue from 300 initial customers.

Using a Loss Leader

In this scenario, NNC made roughly $3 per order. This is a classic “loss leader” situation – the initial sale isn’t profitable.

So, why would NNC pursue this? Their immediate objective wasn’t profit on the first transaction; it was aggressive customer acquisition. They understand that in e-commerce, acquiring that first customer is paramount because:

• Customers can lead to word-of-mouth referrals.
• They often become new social media followers.
• They open doors for future, more profitable follow-up sales through email marketing.
• They generate valuable customer reviews that build future trust.

CACs for the Startup

NNC successfully acquired 300 customers. The true test for them is whether this initial investment will pay off over the next 2, 6, or 12 months through repeat business and customer Lifetime Value (LTV).

• For NNC, their initial Cost Per Purchase (or Customer Acquisition Cost – CAC) was $33.33.

Their strategic next step would involve running targeted retargeting campaigns to these new customers, perhaps with exclusive offers, aiming to significantly increase the revenue per purchase on subsequent orders and drive towards long-term profitability.

See Also:

• How much are businesses spending on ads?
• How much should my business spend on ads?

Example B: Target – The Established Giant

Now, consider a brand like Target.

This is a completely different landscape.

They have decades of established customer loyalty, immense brand trust, and massive brand authority built over years.

Target’s marketing budget is colossal, estimated at $5 billion annually, spanning every conceivable channel. Their strategy is broad, encompassing brand awareness ads, engagement ads, sophisticated retargeting campaigns, lead generation, and direct sales ads.

Given their diversified, massive marketing efforts and their reported net profits of $4 billion, it’s safe to assume their cost per sale is significantly lower than their Average Order Value across their vast product range.

• I’d estimate Target’s Ad Cost Per Purchase to be around $3.50, or even lower, due to their existing brand strength and massive scale.

The E-Commerce Startup Reality:

As an unknown brand, NoNameClothing will have several realities to come to grips with:

• Their initial Cost Per Sale (or CAC) will likely be higher than what established brands achieve. This is a natural consequence of building brand awareness and trust from the ground up.
• The first sale is an investment. It’s about acquiring a new customer who has the potential to become a loyal, repeat buyer. Their post-purchase strategy (email marketing, community building) is critical for converting these initial sales into long-term profit.
• As NoNameClothing invests in its brand, presence, and customer base, their Cost Per Sale will naturally decrease over time.

2. Understanding Advertising in the Startup Phase: Test, Learn, Optimize

For a startup with a limited budget, advertising isn’t just about spending money to get sales; it’s equally about learning.

Every dollar you invest in ads is an investment in understanding your market.

The “Test, Learn, Optimize, Scale” Cycle

This is the fundamental process for successful advertising in the startup phase:

• Test: We start with smaller budgets and highly focused campaigns. The goal is to experiment with different ad creatives (headlines, images, videos), messaging, and audience targeting. This is where A/B testing is crucial.
• Learn: We meticulously analyze the data generated by these tests. Which ads received clicks? Which ones led to actual sales? What content performed poorly? This data is invaluable for understanding your audience’s response.
• Optimize: Based on what we learn, we make informed adjustments. We pause underperforming ads, allocate more budget to winning campaigns, refine audience targeting, and tweak messaging. This is an ongoing process – advertising is never a “set it and forget it” activity.
• Scale: Only when we identify campaigns that consistently deliver profitable sales (meaning the revenue generated from sales significantly exceeds the ad spend to acquire them), do we gradually increase the budget. We prioritize scaling what’s proven to work.

Why Platform Choice Matters Immensely: The Role of Social Media in E-Commerce

When budgets are limited, every dollar must be strategic.

This leads us back to the fundamental question: What kind of data do you want to prioritize?

Social Media Ads (e.g., Instagram, TikTok)

• These platforms are phenomenal for brand awareness, engagement, and showcasing your unique “Stellar vibe” and community. Users on these platforms are primarily there for entertainment, connection, and discovery. They are typically higher up in the marketing funnel (Top-of-Funnel – TOFU), in the awareness or interest phase, rather than actively looking to buy. Getting a direct sale from a social ad can be more challenging and often requires more sophisticated (and potentially costly) retargeting strategies to push users down the funnel.

The Need for Branding in E-Commerce

The challenge with prioritizing brand engagement data from social media with a limited budget is that the journey to seeing direct, tangible sales results can be longer and may require more patience.

The immediate return on ad spend might be lower, even if the long-term brand building is valuable.

Google Ads (versus Social Media for Initial Sales)

While social media excels at brand building, platforms like Google Ads (especially Google Shopping and Search Ads) are generally more effective for direct sales conversions in the startup phase. This is because Google Ads targets users with high purchase intent – they are actively searching for products like yours.

Navigating the Risks in E-Commerce

With a limited budget, you face a trade-off between speed to sales and comprehensive brand building.

Immediate Sales with a Limited Budget are Hard to Achieve

The challenge with prioritizing immediate sales conversions on a very limited budget is that obtaining robust, statistically significant data for rapid optimization can be a slower process.

You might need to be patient for enough conversions to truly understand what’s working best.

Investing in Brand can be less Predictable

The challenge with prioritizing early brand engagement data on social media is that the path to direct revenue may be less predictable and require a sustained, longer-term investment of time and patience.

While crucial for long-term growth, it might not provide the immediate sales validation a startup needs.

Ultimately, understanding these nuances is key.

Concluding Thoughts

For an e-commerce’s initial push with a limited budget, focusing on high-intent sales channels like Google Ads often provides the most direct route to acquiring those crucial first customers and generating the sales data needed to grow intelligently.

Once a consistent sales pipeline is established, expanding into the powerful brand-building capabilities of social media advertising becomes the strategic next step.