Balance Spending for Better ROI

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With the recent decline in Internet stock valuations, many marketing teams at online retailers are feeling pressure to reduce their marketing spends.


The best way to do this is to divide your spending into two camps: immeasurable and measurable. It's about return on investment when budgets are tight.


The immeasurable marketing spends are those that you think make sense, but at the end of the day, you can't get to an ROI. These are traditional offline venues such as outdoor, print, radio and television.


While many online marketers will argue that you can track these spends with special codes, toll-free numbers or special URLs, let's face it; When we see URLs like http://www.companyname.com/welcome/code100389378, we just type the company name and go from there.


Generally, a large enough population of responders does this to skew any ROI calculation enough to make the promotion look like a poor campaign. Since you can't measure these marketing spends, when looking at your budget, you will have to make tough decisions that get more to the art of marketing than the science.


As online retailers get more familiar with the online world, the concept of ROI tends to evolve. Here are the typical concepts of ROI that marketers go through as they gain more experience in this world:


• Customer to the site value. In this ROI concept, you take the number of customer visits to the site over a period of time and divide by sales for the same period of time. That equals the value of a customer visit. Then your ROI for marketing spend is based on dollar spend to number of customer visits. This ROI measurement is easy to track and calculate. The problem is, it does not separate out the value of a "looker" vs. a short-term and long-term buyer.


• Purchase value. This ROI measurement takes a customer's average purchase and determines the ROI by dividing the cost of a marketing spend and how many visits it generates to get a dollar-cost-to-dollar-generated ratio. This ROI measurement is harder to track and calculate because you need real-time traffic data combined with purchasing data.


• Lifetime value of customer. The holy grail of ROI calculations is to determine the LTV of a customer, then figure out percentages of new customers who register, buy and become long-term customers. Once you know these values, you can compare your marketing spend with how many long-term customers are generated and can calculate a marketing cost-to-dollar long-term ratio. This model is daunting because you need a great deal of historical data and the ability to track a customer source not just for an individual sale, but for the lifetime of the sale.


Where are you on this scale? Do you have data to get a lifetime value calculation? The benefit of the lifetime model is that once it is set up, you can explore different measurable marketing avenues to see which one generates the best long-term customers vs. spends that may generate short-term sales blips but don't create long-term customer value.


Now that you are thinking about the ROI concept, let's look at the two spend models that are commonplace with measurable online marketing: the cost-per-thousand-page-views and the cost-per-click model.


In the CPM model, used by 99 percent of banner ads , you can start your ROI calculations by breaking down the cost of the spend to this simple formula, which uses the click-through rate to determine site visits: Cost per visit to site = $CPM x CTR. For example, a $30 CPM banner program that generates a 1 percent CTR costs 30 cents/visitor: $30 CPM x .01 = 30 cents/visit.


Then you can gauge how many people you want to come to your site by increasing the reach or overall page views of the program once you know the general CTR.


There is value in branding nonclicked banner page views, but that falls into the immeasurable camp, so we don't consider that here.


In the CPC model, you list your site or products with a search or shopping engine that delivers qualified leads to your store. The value of these leads may vary. For example, if you buy the keyword "luggage" in a search engine, this may be worth less to you than a lead who is looking for "backpacks."


In any case, the CPC model makes the math easy because your cost per site visit is equal to the CPC.


With CPC, you can frequently tag and track programs more effectively. In the above example, you could track the traffic from the luggage keyword and compare that with what customers who come for backpacks do. Maybe backpack customers buy more and tend to be long-time customers more often than people looking for luggage. With the CPC model this is called the context of the marketing, and tracking it can be a big step to leveraging your ROI.


When evaluating your marketing budget, it is important to realize the differences in CPC vs. CPM marketing. Here are some general pros and cons:


CPM Pros


• It is the prevailing model, understood and used by most advertisers and agencies.


• Creative control over banners.


• Extra benefit of impression marketing.


• ROI measurements are possible.


CPM Cons


• CTR controls the effectiveness.


• CTRs are trending downward quickly (the industry average is 0.5 percent).


• No direct correlation between clicks and cost (e.g., you can run a $20,000 campaign and get no clicks).


• Context not available in many cases.


CPC Pros


• Performance-based campaigns.


• You control the cost and dollars per visit.


• Ability to determine position on leading search engines.


• ROI measurements are easy to track.


• Contextual in nature, so you can track ROI contextually.


• Flexibility of campaigns and targeting.


CPC Cons


• Limited availability, not available through many agencies.


• Typically text links and not graphic banners, which creates limited impression benefits.


To get to the ROI measurements with both CPC and CPM models, you will need to track visitors to your site, monitor which ones become customers and make sure that feedback is added to the effectiveness of your campaign. For example, you may have program A that generates 1,000 visitors a day, but only 10 become long-term customers. Program B may generate 100 visitors a day, but 20 become long-term customers. Depending on your value of a long-term customer, the first program may not make the ROI cut.


Fortunately, there are several options in measurable marketing. The most important hurdle in leveraging the measurable marketing is tying your marketing spend directly to an ROI. Once you have done that, you can experiment with CPM-based and CPC-based programs to see which gives you the best results and plan your budget accordingly. Finding the balance between these two measurable marketing venues is the key to a successful, ROI-tracked campaign in the new, "prove the value of marketing spend" environment.
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