Online Ad Spend: Strategic Considerations
Five ways to boost your return-on-advertising investment.
Five ways to boost your return-on-advertising investment.
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:
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):
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.