Death of the marketing budget

Jonathan Shapiro
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Media Planning & Buying Posted on December 16, 2009

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In practice: Search and email

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.

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Marjory Meechan January 13, 2010 at 6:11 PM

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.

Peter Klein January 4, 2010 at 1:06 PM

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!

Scott Bauman December 17, 2009 at 3:31 PM

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.

Thanks.

Richard Roberts December 16, 2009 at 9:52 PM

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hometheater.org.uk and more. See details at www.hdhometheater.com bottom of page. Their are many ways for corporations to come together and share the cost. They just seem a little hesitant to take the lead. Did I mention the $3,000,000 commission

To the future of hd
Richard Roberts Twitter username: hdhometheater

Mary Jefferson December 16, 2009 at 10:59 AM

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.

masn masn December 16, 2009 at 10:40 AM

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
http://pm2pm.blogspot.com/2009/01/advertising-agency-compensation.html

Fred Buhr December 16, 2009 at 9:34 AM

marketing budget is dead, long live cost of sales!

Mark Patron December 16, 2009 at 8:19 AM

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

Mark