Amidst the worst financial crisis since the Great Depression, companies are slashing jobs, slowing growth and cutting costs. One of the first costs to get cut are usually in marketing and advertising.
The problem is the direct correlation between marketing and advertising efforts, and your sales needle. Companies are pressured to cut costs, yet maintain or grow sales, even in down economies. They are going to be forced to do more with less, and be more efficient with spending. Well, the reality is that you should be doing that anyway and your agency should be helping you achieve better marketing performance.
Are you measuring the results of your marketing and advertising efforts? What if you end up cutting something from the budget that is working? The concern is that companies are widely slashing efforts with high acquisition cost, cutting loyalty and reward programs – all of the things that could be producing the best results.
We recently wrote a post on measuring the lifetime value of the customer, and here is another example of how we can use this kind of data to make these crucial decisions.
In the simplified example above, we look at four different types of marketing channels. Each has a varying cost per acquisition (or the cost to get a new customer), and we assume that each new customer channel contributes the same net margin per month over varying tenures (a.k.a. lifetime value of the customer).
If you are not measuring cost per acquisition and lifetime value (LTV), you may be quick to decide to slash the efforts with the highest costs – in this case everything except direct mail. This is precisely why we like to compare each of these using the Effectiveness Ratio, which is defined as:
Effectiveness Ratio: Value / Acquisition Cost
where Value equals Net Contribution Margin/Mo. times Tenure.
We can quickly see that eliminating paid search would be a detriment to long-term sales. If we had to cut costs, perhaps we should cut public relations and direct mail in this example. Also, I am not discounting the sheer number of customers that each channel produces either, hence this is a simple demonstration to point out the importance of marketing measurement, and the types of measurement you should be making.
I’m Not Measuring This Way – How Do We Get Started?
There are some basic data capturing mechanisms you can use to get started on the path to better marketing performance.
1. Track the source of the sale. Having your front desk attendant asking “how did you hear about us” may not be the most accurate way of measuring leads, so we use software applications to help track the lead all the way to a sale, such as Salesforce.com, or if you want to control the software on your server, you can download a free version of Sugar CRM. Also, use things such as dedicated 800 numbers or unique website URL’s to segregate promotional offers on print or broadcast channels. Online advertising continues to be the easiest to track and one of the most cost-efficient channels to producing sales.
2. Track Spending Per Channel. Track your spend on each campaign effort separately. Ask your agency to breakdown the costs of direct mail, paid search, and other things rather than sending invoices with general “agency fees”. Agencies markup media buys, including online buys, so know what they are and how it affects your ROI. Now that you have your campaign costs and leads broken down into each channel, you can now effectively track ROI and cost per acquisition. This will factor directly into your net contribution margin and should be subtracted from the revenue earned from sales.
3. Track Customer Spending - use your CRM system, or if you are a retail organization, your POS system to track customer spending. Try to uniquely identify the spending by customer ID or email, rather than just by store location or geography. This gets you to the additional granular detail to further segment your data later by usage and spend, and can do wonders in your lifetime value calculations. We can also develop patterns to help re-tool marketing efforts by being more relevant and targeted. From this data is where lifetime value calculations are born.
Are you ready to roll up your sleeves to track the right data and get lean and efficient in your marketing?