Online Ad Spend: Strategic Considerations

The Internet is a popular way to acquire customers. Of course, companies must ask themselves, “How much should we spend to acquire these customers?” The CFO tells you to spend only what you can “afford.” Media companies tell you to spend as much as you can afford, and then some. Now that the Internet has some history behind it, proven techniques can rationally approach this problem.

How much you spend depends on five factors: strategic phase or business goals; financial requirements; customer definition; the firm’s online advertising experience; and cross-channel marketing opportunities.

Strategic Phase

Let your business objectives guide you:

  • New company or market. For a new business, growing a user base is an investment. Be willing to spend any money you make after covering variable costs, the costs associated with producing or acquiring your product and getting it to the customer (this is the contribution margin). Short term, a company must cover these costs to stay in business. Investors won’t support a business with negative cash flow indefinitely. That’s what you’ll have if you don’t cover all your costs.
  • Mature business. Established companies often have acquisition goals and financial metrics that target revenues and profits based on past experience. At a minimum, acquisition results must break even. Hopefully, they contribute to profits in the near term. In this context, marketing costs should be less than or equal to revenue, minus other expenses (e.g., variable costs, premiums, and allocated overhead). In direct marketing, this is called a marketing allowable.
  • High-growth or competitive market. A high growth phase business has a limited window of opportunity, so senior management may elect to invest in advertising to grow market share. Similarly, in a very competitive market, such as online travel, a business may continue to invest in advertising to maintain or grow its share. Not investing may erode the current position and customer base. A parent company may absorb losses because it views market share in one product as a strategic necessity for related products or its future strategic direction. At a minimum, customer acquisition shouldn’t cost more than the revenue streams customers yield; preferably, they should cover their variable costs.

Financial Requirements

Cost-conscious businesses are often expected to break even within the year (i.e., net sales – variable costs – marketing – overhead = 0). New customers must generate sufficient revenue (after returns) to cover variable, marketing, and overhead costs. In reality, it often takes several promotions to cover the initial ad investment. Generally, the cost to acquire a customer is more than the contribution margin on the initial sale. Therefore, it’s helpful to examine customers over a longer period.

Customer Definition

To many marketers, customers are people who purchase products or services from their companies. At this point, customers generate some revenue but may not yet have yielded a profit. Some companies don’t consider a buyer to be a customer until the second purchase. Long term, customer value must exceed the stream of revenue from purchases minus associated variable, marketing, and overhead costs adjusted for the time value of money. (This is roughly equivalent to lifetime value.)

Ongoing marketing is less expensive than acquisition marketing since customers know your brand and offering, and you have their contact information and permission to get in touch. Selling additional products to existing customers can be less expensive.

Online Advertising Experience

If you haven’t already run an online advertising campaign, you must test creative, media, and landing pages to achieve efficiency. Early campaign test costs run high until you learn where and how to modify advertising to yield better acquisition rates. Many advertisers forget to budget for testing. Without past experience, you must rely on your best judgment and industry averages for similar products. Understand actual results may vary significantly.

Cross-Channel Marketing Opportunities

By not considering your advertising’s impact on multiple distribution channels, you may understate its total value . There are two different aspects to consider and measure: the online impact of your offline advertising and the offline impact (e.g., phone and retail) of your online advertising. To capture this information, ask customers where they found out about your firm, use a special URL, or provide an incentive for sharing this information.

Five Ways to Increase Return on Acquisition Investment

If online acquisition spend exceeds budget, you can extend customers’ value (understand, these methods may not be sufficient to support customer acquisition independently):

  • Build a double opt-in email list. Build the list as part of the acquisition process or with visitors who don’t purchase during an initial visit. Use the list to build a relationship with customers and prospects for a relatively modest cost.
  • Cross- or up-sell other products. Use confirmation email, ongoing email messages to the customer list, or ride-along promotions with fulfillment. The customer base can form a test group for new products or campaigns.
  • Implement a formal customer referral program. This can be as simple as asking customers to forward coupons or other content to friends. Or, use an incentive to get customers to refer friends. Consider rewarding both existing and new customers for referrals.
  • Develop third-party advertising vehicles. Customers in purchase mode make better prospects. Act like a publisher and carry third-party advertising on your Web site. Also put related, non-competitor inserts in your shipment packages. Offline direct marketers have been doing this for years.
  • Use co-registration with a related company to expand your house file. As part of your registration process, customers can sign up for your partner’s list. They can sign up for your list when registering with your partner. This should help cost-effectively grow your list but may require additional marketing.

In today’s cost-conscious world, you must balance acquisition costs with customers’ long-term contributions to your firm’s bottom line. This isn’t just a set of financial tradeoffs. Acquisition investment’s true value is customers’ profit margin over time, the customers they refer to you, and their positive word of mouth supporting your offering. In this consumer-centric marketplace, consider how to nurture and enhance this relationship over time. Consider all strategic assets, including your house file, to maximize return on investment.

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