Traffic Arbitrage

“[Meta/Facebook/Instagram/Google] ads don’t make businesses. They scale businesses.”

I can’t remember who said that but the ultimate truth of digital advertising is that this is true. It’s basically true of any kind of advertising in general but even in the post-iOS 11 world of digital ads it is easier, faster, simpler, and more data-driven than ever to run Meta/Facebook/Instagram/Google advertising to drive traffic to your website that you turn into customers.

This is what I mean by “traffic arbitrage” and it’s basically how I think about digital advertising for my clients.

To create traffic arbitrage through digital ecommerce advertising you’ll need the following, roughly in order of importance:

• Product-market fit.

As per the quote up top. Ads won’t create a business for you but they’ll create demand for a business that works. The upside is that ads can scale all the good bits of your business — traffic, revenue, customers — and the downside is that they’ll also scale all the bad bits of your business — hard margins, slow shipping, customer service.

You’ll also have to start here with product-market fit to get a sense for your conversion rate because this is going to be the number that helps you dictate how much to invest upfront.

• A profit margin that has room for top of funnel advertising.

Ecommerce is hard with a margin less than 60%. You have to account for costs-per-acquisition — which we’ll touch on soon —, shipping, returns, overheads if you have staff. All that good stuff. It’s not impossible and there are products that benefit from lower price points because they’re easy impulse buys (remember fidget spinners?) but as a general rule you want great margins to give you room to invest in marketing with a fixed-cost kind of attitude (eg. a flat percentage of monthly revenue on ads) and so that you can actually pull a profit at the end of the day.

As a rule of thumb, aim for a landed gross margin of 70%.

• A strong understanding of why your customer buys your product.

This is creatively the most necessary part of the puzzle but as traffic arbitrage is largely a function of numbers — as with any kind of arbitrage — , we’ve prioritised operational efficiencies. This is also the part of the process that you’ll be iterating upon the most as you look to find ads that work.

This can be anything. At TradeMutt it’s because of our social impact — customers purchase with the emotional attachment to the mental health of the tradies they love; customers purchase because we donate 50% of our profits to TIACS to provide professional mental health counselling for free to our customers; customers purchase too because they just love the different designs of the shirts.

Your hook can be anything. It can be a fun gag that’s inexpensive so it’s an easy impulse buy. It could be that your quality is so much better than your competitors that it’s a no-brainer. It could be that you offer a product so niche and so hard to otherwise find that placing a good ad in front of your customer will spur them to purchase straight away.

The digital ad traffic arbitrage process for businesses that are new online:

• Identify an amount of your margin — as a $ figure — that you’re prepared to invest in advertising to scale.

Make sure these are realistic numbers. It could be for instance that you’re prepared to invest 10% of your overall revenue for a month. Write that down as a dollar figure that you’ll invest on a forward basis. Assume too that once you commit, unless you strike catastrophe, this number might go down but never off.

You could work this out too as a per order number if you like but a % of revenue is the most straightforward way to pick an ad budget. It’s also the most flexible as you can adjust budgets daily if necessary but don’t be too hacky here. Commit to the process and make slow but confident changes.

• Invest this amount as a daily budget.

Whether you’re investing in Meta ads (Facebook and Instagram), Google ads, TikTok, Pinterest, what have you, start to invest this money every day.

• Give this budget time to work.

Do not make knee jerk reactions to a single day of trade with your new advertising. At scale, yes, you want to be aggressive with your Facebook ads in particular. Culture Kings famously used to give their ads four hours to start working or they’d be turned off. Cull the weak for sure. But later on.

For now, benchmark the following from your new investment:

• Conversion rate

This is the guiding metric for traffic arbitrage so make sure that this is consistent. Your conversion rate should be affected positively by sales periods and negatively by being out of stock, otherwise it should basically hold steady if you’re just running BAU operations (eg. just ads, no organic social or email).

• Ad spend

Of course.

• Clickthrough rates

Make sure this is an ‘outbound click’ in your Campaign Manager not just a standard clickthrough because we want to measure an audience’s willingness to head to your website and make a purchase.

Then it’s just a balance of finding what your arbitrage looks like. 

What you should be seeing is that as your ad spend changes so does your traffic in a roughly correlated fashion. Days fluctuate of course but if you double your spend you should be getting double-ish your traffic. Doubling spend fast might affect which audiences you’re targeting based on your setup, assuming you’re using Meta/Facebook/Instagram so it’s not strictly 1:1 often but as a general rule: your traffic should follow the lead of your ad spend. The metric you need to work on if this is not the case is your ad spend. Work on this metric with new creative. 

Do not default to just throwing stuff on sale. Sell at full price. Work out how to sell at full price to your customer. Then your conversion rate should hold true assuming you’re not getting wacky with weird objectives like link clicks or landing page views or just experimenting with weird clickbait creative. 

Now of course there are lagging behaviours on just about all purchasing. You will of course see immediate purchases but the real value of the traffic you’re driving that’s not necessarily converting straight away is building your email list.

Traffic arbitrage with digital ads for your ecommerce business is simple.

The hard part should be the creativity — the framework for the way that your traffic works is this traffic arbitrage system that’s simple, easy to understand, and will give you room to scale once you’ve got initial traffic and benchmarks. Of course it can be scary to start spending thousands per day but if you want to make tens of thousands per day this is where you’ll have to get to.

Any questions? Feel free to flick me an email and we can chat.