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Death of the marketing budget

Jonathan Shapiro
Death of the marketing budget Jonathan Shapiro

For the right advertisers, the internet offers numerous ways to create demonstrable and predictable ROI from one's marketing efforts. Thus, there is no longer the need for a budget that limits progressive marketers. When one sees positive ROI from a marketing campaign, the profit-maximizing thing to do is spend as much as you can. Unfortunately, this is a completely different mindset from the static, set-piece budget battles that marketers have fought with their corporate counterparts throughout the 20th century.

This might come as a newsflash to those CMOs on calendar-year planning cycles who just went through the budgetary buzzsaw with their CFOs in an effort to beg, borrow, and steal marketing dollars for 2010 -- but it is not a misprint or a delusion. In the past 15 years, the advertising game has been turned on its head by the rise of the internet and the emergence of performance marketing. According to Forrester Research, by 2014, interactive marketing will near $55 billion and represent 21 percent of all marketing spend. Those who understand and exploit the new marketing opportunities will be freed from the tyranny of a "percentage of sales" budget and be empowered to drive increased profits through performance marketing programs that deliver predictable and demonstrable returns on marketing investments.

If you're frustrated by the annual scramble for budget scraps, it's time to initiate a conversation within your company that moves your model beyond the antiquated set-in-stone marketing budget. Read on to gain a better understanding of the case to be made for performance marketing, whereby your success dictates greater marketing reinvestments.

Over the past decade, marketing has become more complex and harder to execute. Audience fragmentation has accelerated each year of the new millennium, making old stand-bys like upfront TV buys and mass-market targeting seem ossified and indefensible to all but the largest brands. There has also been democratization of content as citizen bloggers and social media replaced networks and magazines as authoritative contexts where product shout-outs and endorsements drive sales and market share. Add to all of this the proliferation of digital media channels -- email, search, social, mobile, and display -- and it is easy to see how unfit for duty yesterday's marketing assumptions and budgets have become.

More importantly, advertising and marketing have become more targeted and measurable, appropriately raising expectations. We can now determine, with accuracy and predictability, marketing ROI by the specific campaign and/or program component. In this environment, early 20th century department store mogul John Wanamaker's cry for help ("Half the money I spend on advertising is wasted; the trouble is I don't know which half.") is dead -- and soon to follow it into the grave will be the annual, set-in-stone marketing budget.

Performance marketing's advantage
What if I offered to sell you $10 bills for $5 dollars each -- how many would you want? What would your budget for $10 bills be? Most of us would choose to not cap our spend, taking as many of the crisp ten spots as were available. The implication is that if you know you are going to make a profit, the constraint is not a budget but the supply of profit drivers. Online advertising and the performance marketing revolution that has helped fuel its growth has enabled CMOs to figuratively buy $10 bills for $5 each. Good performance marketing online offers the opportunity to spend adverting and marketing dollars that create demonstrable profits at a predictable and repeatable rate.

Building marketing programs with predictable and reliable profits is the original promise of marketing on the internet but, as stated earlier, is hard to do and getting more complex. Online performance marketers start with the premise that advertisers will reach the right customers (i.e., those who are in market with a demonstrable interest in your product or service). This enables advertisers to only pay for the action (the search click, the form fill, etc.) that is proof positive the potential customer is in the market and considering your particular offering.

Take a closer look at how two online marketing disciplines work will illuminate this point about performance.

Search marketing
In search marketing, the end-user has intent as they are searching, while the advertiser only pays for the click -- proof the consumer is interested in its product or service. With the click, the conversation between advertiser and consumer begins. In 2009, tracking conversions from click to sale is no longer state of the art, but state of the practice. As long as an advertiser understands the profitability of each sale and the conversion rate from click to sale, she knows the value of each search click (profitability of sale * conversion rate of click to sale = value of a click). As long as she is buying clicks from the likes of Google for less than the value of each click, she is guaranteeing a profit on her search marketing spend -- just like buying $10 bills for $5!

Email marketing
A second example comes from email marketing, under the assumption the email program has been purchased on a CPA basis and the action for which an advertiser pays is a completed form requesting more information.

First, an opt-in email is sent by an email publisher. If recipients are interested in the subject, they open the email. If they are interested in the offer, they click through to the advertiser's site. If they intend to purchase (or at least strongly consider a purchase), they fill out a form requesting information. Here, the advertiser pays only per form requesting information. As long as the advertiser understands the conversion from request for information to sales and the value of each sale, the advertiser can understand the value of each form submitted. Again, if the advertiser is buying request-for-information forms submitted for less than the value of each form, that's like figuratively buying $10 bills for $5 -- and literally guaranteeing a positive ROI for each marketing dollar spent.

These simple examples make plain the power of online performance advertising. In both cases (provided the value of a sale and the conversion from action to sale are understood), the advertisers would be wise to spend as much as they can. The new limits on this spend are how much can be spent while maintaining the conversion and sale values, or the capacity of the advertiser to deliver products and services. What's clear is that it is not the annual marketing budget.

While these principles are simple, execution is hard because online programs have many key success factors. These include:

  • Managing a portfolio of multiple, evolving media types (search, display, email, co-registration, affiliate, etc.) with different conversion characteristics.

  • Purchasing the media so as to limit advertiser risk (e.g., CPA, CPC, CPL).

  • Targeting to ensure conversion rates and sale values stay satisfactory.

  • Developing creative for all consumer touch points (both advertising and user experience) that drive conversion -- and understanding that sometimes ugly works!

  • Capturing, qualifying, and converting customer data. Advertisers need the right tools to transform customer information they gather during the performance marketing process into sales.

  • Responding rapidly to initial interest. According to an MIT study, responding to consumer interest within five minutes versus the following day increases conversion 100-fold!

  • Continuously optimizing. Performance marketing takes place in a dynamic marketplace. Successful marketers will continuously optimize their media, creative, target segments, and sales process to maximize profits.

As organizations get better at aligning these key success factors, the competition for in-market, forward-leaning consumers gets more intense. Once advertisers figure out how to optimize their programs, the value of each action (clicks, phone calls, requests for information, etc.) goes up. As the value of each action rises for advertisers, they are able to pay more for the media that drive these actions and thus price out the competition. This is good news for the profit optimizers who are measuring and managing marketing ROI, but it's a red flag to budget-bound marketing organizations that are ill-equipped to manage the new realities.

For advertisers that understand well the value of a sale and how their marketing converts into sales, the marketing budget as we know it is dead. It has been replaced with innovative, integrated marketing programs that will seek to invest every dollar possible that drives a positive ROI. These programs will be continuously improved to ensure advertisers compete effectively while driving positive returns for their marketing investments.

A case history will drive this point home. American Laser Center (ALC) initiated an online performance marketing campaign that, in a little less than12 months, has grown to drive more than $20 million in annual sales, with proven profits. The program, which includes search, email, affiliate, and data acquisition, has been continuously optimized to enable a three-fold increase in marketing spend while maintaining the profitability of each marketing dollar spent.

One notable feature of the program was the use of the Google Content Network (GCN) to overcome the seasonality of ALC's advertising campaigns and provide more conversions at less cost. In Q1 2009, traditionally a slower season, ALC used GCN text and GCN display in tandem to provide the best combination of results for its campaign. (Text provided a high level of volume while display yielded lower cost per conversion.) This innovative strategy, combined with ongoing optimization, led to the percentage of productive leads coming from GCN to rise dramatically in every quarter since Q4 2008. In fact:

  • ALC saw a 233 percent lift in conversion rate between Q4 2008 and Q1 2009.

  • The company cut impressions in half while simultaneously increasing conversions by 365 percent between Q4 2008 and Q1 2009.

  • GCN made up 15 percent of all ALC's online sales in Q4 2008, then 23 percent in Q1 2009, and 31 percent of online sales in Q2 2009.

The efficiencies gained by optimizing the Google Content Network were plowed back into the larger marketing program and helped fuel the dramatic growth in online sales and profits.

The internet has made marketing much more complex. But at the same time, it's also much more measurable and accountable. Because CMOs can determine which parts of the marketing portfolio provide the greatest return on investment, they can demand more from their marketing spend. Successful marketing is becoming less about bigger budgets and more about delivering ROI to a C-suite audience. Industry awards for creativity and the CEO "seeing his ad on a hit program" won't cut it any longer. Marketing now requires being ruthlessly focused on delivering measurable profits. This focus, combined with putting the power of online performance marketing in a CMO's hands, can help advertisers take their game to the next level.

Future winners in the online marketing space will understand that success means investing in performance marketing programs of continuous improvement that provide increasing and demonstrable profits. That's performance marketing, and you won't want to cap its success with an annual budget.

Jonathan Shapiro is CEO of MediaWhiz.

On Twitter? Follow iMedia Connection at @iMediaTweet.


to leave comments.

Commenter: Marjory Meechan

2010, January 13

I think MediaWhiz has the right idea in pursuing this line. it just makes sense. The only issue that I can see would be in the evaluation of performance - both for the advertiser and the marketing firm.

Commenter: Peter Klein

2010, January 04

I completely agree with Jonathan. There is a reason that affiliate marketing is considered performance marketing – you pay ONLY for performance. Optimize the proper channels and there should never be a lead or budget restraint.

I like the analogy of buying $10 bills for $5. With Affiliate Summit West in Las Vegas coming up in 2 weeks, I'll take those odds of winning to the bank every time!

Commenter: Scott Bauman

2009, December 17

Nice piece Jonathan. Well argued and timely. I think the best days are ahead for analytic-driven performance marketing. Until now, most talk about analytics and measurement has been just talk. Many companies now have real religion thanks to the visibility online marketing affords. For others, your piece will be welcome prophecy.


Commenter: Richard Roberts

2009, December 16

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Commenter: Mary Jefferson

2009, December 16

I mostly agree with you. Internet marketing has made our jobs easier in some ways and we can more accurately determine successful campaigns using various tracking mechanisms. There are, however, two factors that limit the ability to accurately determine the ROI for a company. One of those factors is the projected length of time between when a person researches the product or service he/she is interested in and the day he/she agrees to acquire the service. In some industries, that can be months. Quite often, in fact, the research is done on an anonymous basis. The browser doesn't want to fill out any form or request any information until later. And later, might be months later and it might be by phone. Most companies don't have the capability to track a browser who came to the site 3 months ago and know that it is the same person who made the phone call today, asking for more information.

Secondly - many companies sell products through a third party. Take insurance for example. The insurance company may promote a product through their website, but the business customer is purchasing the product through his/her broker. If that's the case, the browser might send the information to his/her broker. If the broker has a relationship with the insurance company already, chances are the inquiry is made through a phone call.

In both cases above, click throughs are recorded but there is very little chance that the resulting sale is credited to the internet advertising campaign.

Commenter: masn masn

2009, December 16

Glad you're shining a light on this topic. In my experience, especially with the financial implosions this year, performance is gaining ground.

Agencies can play a role in driving this more highly evolved business model by moving to more performance-based engagements as well.

As you rightly point out, "While these principles, are simple, execution is hard because online programs have many key success factors." The complexity increases considerably when you fold agency compensation into the mix. It requires a level of collaboration and transparency (between agencies & clients as well as amongst various agencies serving the same clients) that's not the norm.

However, finding the win/win is a laudable pursuit. For more on this, see:

Advertising Agency Compensation - Exploring Alternatives

Commenter: Fred Buhr

2009, December 16

marketing budget is dead, long live cost of sales!

Commenter: Mark Patron

2009, December 16

Hi Jonathan,

Great article. It is extraordinary that while the internet is so measurable and accountable it has taken this long for a wholesome ROI approach. There has been too much build it and they will come, and if we get our brand out in front of enough eyeballs we will be OK. There is no doubt performance marketing programs that provide increasing and demonstrable profits will replace set budgets going forward.

All the best