Data-driven direct response marketing is a money-printing machine. Marketing budgets are a holdover from former days when you didn’t know the results until weeks or months after you paid for it. Budgets are for testing. Once you have proven the profitability of your traffic channel, you should run full steam ahead.
ROI from search marketing can be monitored in near real time. E-commerce sites need only float marketing capital for two to three days while awaiting revenues to be transferred from merchant to bank accounts. As such, transaction-based websites should run with an unlimited search marketing budget, subject only to day-to-day profitability.
While the unlimited budget concept is simple to understand, there are some normal hesitations to turning on the fire hose. Your marketing must first be accountable. Second, it must be profitable. Third, it must be reliable. Here are some strategies to give responsible boldness to your marketing dollars – and give you that unlimited budget.
Step 1: Determine Your Optimum CPA
The first step in data-driven marketing is to determine how much you’re willing to pay in marketing costs to get a sale. You must take into account such variables as product cost, overhead, and desired margin. The figure you’re willing to pay is your cost per action (CPA). Your search marketing success will be judged by this number.
Only it isn’t that easy. The hidden part of the equation is volume. The amount you’re willing to pay for a sale will determine how much advertising you are able to purchase. The more you pay for traffic, the more sales you make, but the less profit you make per sale. You must find the optimum CPA that brings in the most total profit. This number is usually quite different from what you’d guess. Testing alone will reveal the volume available at different spend levels.
CPA is the ideal metric under any of the following conditions:
- You are paying for leads of equal value
- Your e-commerce site sells only one front-end product
- Your order value doesn’t fluctuate much, and neither do your margins
If you don’t have a predictable order value and/or your margins vary considerably throughout your catalog, you should instead measure your marketing success by return on ad spend (ROAS) or value/cost. The “value” you track can either be order value or the order value minus your costs. This will provide visibility into your actual profitability and help you manage spend accordingly.
Step 2: Turn on the Hose
Start spending some cash. If this is a new traffic channel, a budget will come in handy to lower your risk of loss. Once you know how profitably the traffic converts, your need for a set budget will diminish.
Step 3: Track Your Results
All of this is futile if you don’t have reliable tracking in place. At a minimum, you must be tracking spend and sales from every traffic channel. In reality, you should track everything. All aspects of your campaigns should be tagged, so individual components and ads can be measured and managed for profitability.
Step 4: Make Corrections
At this point, your spend level is high, low, or just right. If you’ve spent too much, your natural instinct is to decrease your spend. Indeed, this is the obvious response. Be careful, however, that you don’t get back into a “budget” mentality.
Let’s say you’ve determined that a $60 CPA makes you the most money. A certain campaign has spent $70. Assuming you’ve got enough data to make a decision (your sample size needs to encompass more than just a few actions), you’ll want to lower your spend level going forward.
This may appear elementary, but there is a powerful psychological urge to overcompensate and shoot for a lower CPA so that your average for the month will appear solid. This is a misguided attempt to “punish” the overspending, or worse, to hide the overspending from your boss.
Two things to keep in mind: 1) Overspending is part of the process of finding your ideal spend and profitability level. As long as it doesn’t go on for longer than necessary, there’s nothing to be ashamed of. 2) Overspending is by definition in the past and is thus a sunk cost. You can’t change the past. You should not factor sunk costs into future spending decisions, unless there is actually no more money left that can be spent.
If your goal is to actually make the most profit, not just have the cleanest looking reports, you need to put the past behind you and again shoot for the CPA that will make you the most money. If you are $10 over your $60 CPA on day 15 of the month, you should not start targeting $50 for the remainder of the month. Yes, this would put your average for the month at $60. Yet your total profit will be diminished because you lost the additional volume that the $60 CPA would have brought you in the second half of the month.
When to Use a Budget
I’ve already mentioned above that a budget makes sense when testing new traffic sources. There are additional situations where it does make sense to stick to a budget, even when your traffic source has proven profitability.
Cash Flow Constraint Due to Long Buying Cycle
You probably don’t have unlimited capital. Even if you are certain the marketing spend will be profitable, it may take a few months or more to recoup your investment. This is common when buying leads that have a long sales cycle. It is also common in SaaS (Software as a Service) businesses that rely on monthly recurring revenue from their customers. In cases such as these, your marketing budget will be tied to your cash flow position.
Uncertain Lead and Customer Quality
When you increase your spending and the volume of online advertising, the marginal increase in traffic is often of reduced quality. You can’t be certain how this additional traffic will convert, so it makes sense to approach this additional spending with caution. It may not require a fixed budget, but additional spending certainly requires a watchful eye.
Production and Inventory Constraints
If you can’t physically service the additional customers, by all means put a cap on your marketing. This is a great problem to have and should be looked on as an opportunity for growth.
When spend does need to be reduced, the most profitable way to reduce your spend usually isn’t to cap your overall spending with a budget, but instead to lower your target CPA. This will accomplish the same goal, but will give you more profit from every sale you do make.
Otherwise, a budget cap usually works to simply stop your ad from showing once the budget has been reached. It is better to show your ad consistently at $1 per click than to show your ad for half the day at $2 per click.
It may take some convincing to loosen the budget limitations from your marketing. Tracked profits and solid ROAS are your weapons. Your goal is to make the most profit for your company, so your cautious budget needs to go.
This column was originally published in SES Magazine in July 2010.
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