Why Most Companies Waste 60-70% Of Their Marketing Budget Without Even Knowing It

John Wanamaker (1838-1922), department-store magnate, once said,

Half the money I spend on advertising is wasted; the trouble is I don’t know which half

Today CEO’s and Marketing Managers, knowingly or unknowingly face the same challenge, except there is no reason to.

With technological advances in user behaviour tracking, there are no excuses for not knowing which portions are being wasted and what yield every dollar is producing.

In this article I’m going to uncover the top mistakes I see being made and what you can do to fix them, so you’re confident that every marketing dollar spent is working hard to deliver results.

But first, John Wanamaker was wrong about one thing.

After reviewing thousands of campaigns and spending more than 20,000 hours working on results based digital marketing strategies, there is one thing I can say for sure. No matter how long you sit there and try to craft the perfect ad aimed at the perfect audience, 60-70% of your ad budget will be ineffective.

20-30% of the same budget will yield average results (breaking even or making a small profit), while the key 5-10% of the budget will return an exponentially higher return on investment. Typically 8 to 25 times higher.

You don’t need to be a genius to figure out that if you reallocate 90-95% of the budget set for low performing ads to the high performing segments, profits will soar.

So why are most CEOs not having this conversation with their marketing staff?

Many Digital Marketing Agencies and Marketing Managers say it can’t be done, or they give you “Vanity Metrics” to satisfy your hunger for clarity. In reality, all they are doing is covering up their inability to give you what you really want – Full visibility and accountability on the returns generated from every dollar invested in Digital Marketing.

My Definition of Vanity Metrics –  Reported data which lacks actionable insights and only exists to make one feel good. These include, but are not limited to, the number of visitors to a website, Facebook Likes, Twitter Followers, Advertising impressions, Click Through Rate, Google rankings, the list goes on.

I work with “Actionable Metrics” which we will cover later in this article.

Now I’m not saying that all Digital Marketing Agencies (I own one and consult to others) or Marketing Managers mean any harm. Most of them have the best intentions, but intentions don’t pay the bills.

Many are trained on the theory of marketing (not the results marketing generates) and err on the side of caution when committing to being accountable for driving tangible, in the bank, results.

A worldwide survey conducted by the Fournaise Marketing Group revealed:

90% of marketing degrees/diplomas around the world lack specific training on Marketing Performance and Marketing ROI, so it’s not surprising that 43% Of Companies Can’t Prove Their Digital Marketing ROI.

Although 85% of marketers are well educated, more than 50% have qualifications in non-marketing related disciplines such as English, History, Economics, Journalism, Sociology and Foreign Languages.

According to Jerome Fontaine, CEO & Marketing Performance Chief of Fournaise,

“In other words, every Tom, Dick & Harry is a marketer, lacking the scientific and financial knowledge expected of marketers to optimise the creative aspect of the discipline. CEOs have told us again and again: they want ROI Marketers, i.e. 360-degree performance machines trained to deliver (real) business results and prove/optimise ROI.

As long as marketers continue to fail to get trained in, master the use of and optimise Marketing Performance & Marketing ROI, they will struggle to demonstrate to CEOs that they are not “money spenders who jump on (and hide) behind the latest facts and blow smoke”, but “real business generators.”

It gets worse

Unfortunately the overwhelming majority of marketers are trained in marketing strategies and tactics, but they miss the critical business acumen to understand precisely how their marketing efforts impact the bottom line.

The reason for this is that they have been an employee their whole life or have just come out of University with a fancy degree and no training or experience in driving profitable sales, let alone ever running a business.

The question begs to be asked – Why give someone the responsibility of driving bottom line growth when they are not qualified to do so?

Now marketing is quite different from sales, or business management. All of these disciplines play different roles and therein lies the problem.

The three roles contribute to the bottom line, but they all operate as individual silos and no one is solely responsible for the whole marketing spend and outcome.

After running my own businesses and helping hundreds of others build their businesses over the years, I can safely say that if a single person is not responsible for the end result, no one is.

But I digress..

The Truth About Digital Marketing Metrics

Google Rankings, Click Through Rate, Impressions, Likes, Followers, Shares, Database Size, Ad Position ALONE HAVE NO DIRECT CORRELATION TO GROWING THE BOTTOM LINE.

Example: Aside from Think Big Online (My Marketing Agency), I own a number of online retail stores. We launched a new online store 6 months ago as a side project which is on track to do well over $1 Million in its first year. At the time of writing this, our primary source of sales come from Facebook ads.

Our biggest competitor in this market does just over $5 Million in sales and have been established for 4 years. They have 135,000 Fans on Facebook. We only have 3,500 Fans on Facebook.

So, if Fans equated to dollars in the bank and we used our competitor as the benchmark, then our new business should be on track to do $129,000 for its first year, but we are already almost doing that number per month now. This goes to show that “Likes” don’t equal money in the bank.

From what has been explained in the example above, you cannot pay for a new house with a “Click Through Rate”.

You can’t buy your wife a new car for you anniversary with how many “Impressions” your ad got.

And when the travel agent asks how you want to pay for your holiday to Hawaii, if you pull out your phone and show them your google rankings, you will probably get laughed out of the door.

So stop accepting these as valid forms of tracking alone and let’s dive deep into what really matters.

The 3 Core Drivers Of A Successful Campaign At A High Level

1.) Setting a tangible objective

If the highest purpose of advertising is to make money, why do so many people still set  core objectives which are superficial?

We see many companies start with the wrong objective. They usually focus on how to “be seen” or “get more exposure”. We have discussed vanity metrics, though I breezed over “Branding” and I need to address it here.

If your marketer or marketing team are focusing on “getting the message out” you are leaving money on the table. A lot of money.

Unless you are as well known to the majority of the world’s population as Nike, Coca-Cola or McDonald’s, you are wasting your money on “being seen”.

Until your marketing is at the point of saturation, “being seen” has no direct correlation to fattening the bottom line.

On the other hand if your core objective is adding profitable and repeat sales to the business,  the inherent proposition is that people will see your message and your company will get more exposure. More importantly, while this happens, you’re making money.

By placing the core objective of banking profitable, repeat sales at the heart of the campaign, you are far more likely to achieve financial and brand recognition.

2.) Knowing what you can spend to buy a client

I think about customer acquisition just like going to the supermarket. You walk down the aisle and you look at your options.

What sort of customers do you feel like buying?

How many do you want?

Do you want the cheaper ones on the bottom shelf that are not so good for you (your business) and are not worth as much?

Or do you want the ones higher up on the shelf that are more expensive and of higher quality?

Personally, I prefer to stay away from the junk food section of the business store and focus on the high value, long lasting clients.

When you know what sort of customers you want to buy, the first thing you need to know before you track anything, is how much you can afford to pay to acquire this customer.

Before it’s possible to know how much you can afford to pay, you need to understand what a client is worth in profit.

This might seem like a simple thing, but how many of you reading this can honestly and accurately say straight out how much a client is worth and what you can afford to pay?

That’s what I thought…

This how you do it at a basic level.

Take the average profit per sale and multiply it by the average number of times a client purchases from you.

Let’s say the average profit is $1,000 per sale and the average client purchases 10 times a year, the average client profit is $10,000.

If we know the average profit is $10,000 then it makes it easy to decide how much we are willing to pay to acquire a client.

How much you are willing to pay depends on two following main factors;

Are you trying to maintain business or grow, and how fast do you want to grow if so?

How much capacity do you have to scale without blowing up the fulfilment department?

On one end of the spectrum you want to grow slowly and profitably. You might be happy to spend $500 in the hope of a 20X return on investment, but you will not be able to attract many new customers, which is okay if you have a limited capacity to deliver.

At the other end of the spectrum you may try to aggressively take over a market and be willing to spend $5,000 to acquire a client, which means you can dominate advertising and your competition.

“Advertising, once a gamble, has thus become, under able direction, one of the safest business ventures. Certainly no other enterprise with comparable possibilities need involve so little risk.”

– Scientific Advertising

“Remember, the company that can afford to pay the most to acquire a client wins every time.”  

If you have done the exercise you know how much you are willing to pay to buy a client, so now you will also know what your marketing budget should be.

Using the example above, if you want to grow the business by $1 million, your average client is worth $10,000 and let’s say you are willing to pay $1,000 to acquire a client, then your marketing budget is $100,000.

1 Million / $10,000 = 100 clients. 100 clients X $1,000 = $100,000.

The next thing you need to know is how many sales you generate from every 10 leads you attract. Otherwise known as your conversion to sale rate.

Let’s say your conversion rate to sale is 3 out of 10, or 30%. Multiply what you are willing to pay for a customer ($1,000) by 30% which gives you a target cost per lead of $300, provided the lead quality stays the same.

3.) Tracking Metrics that can impact the bottom line

Focusing on the end result of how many sales you acquired and how much profit a campaign made is good, however knowing these numbers will not have a direct impact on the business contrary to popular belief.

There are 3 types of metrics:

  1. Vanity Metrics – We have already spoken about this… metrics that have no quantifiable value at all.
  2. Outcome Metrics – These are things like, number of leads, number of sales, net profit. Such values are imperative numbers, but you can not directly change these metrics. You change them through the third type of metrics.
  3. Actionable Metrics – These are hard metrics that drive the outcome metrics. These are the Metrics you have control over.

Before we get into Actionable Metrics, let’s look at the Outcome Metrics you need to track quickly.

  • Advertising Spend
  • Number of Leads
  • Number of Sales
  • Total Value of Sales
  • Net Profit on Marketing
  • ROI on Marketing as a Multiple
  • Average Time to Sale (Important to know for cash flow)

These numbers act as indicators so that you can forecast and plan.

The Numbers That Actually Make a Difference

By tracking our Actionable Metrics separate from our Outcome Metrics we now have clarity over the numbers we can change that will have a large impact on the business.

The Actionable Metrics you need to track are:

  • Number of Visitors
  • Cost Per Visitor
  • Conversion Rate to Lead
  • Cost Per Lead
  • Conversion Rate to Sale
  • Sale Value
  • Number of Purchases
  • Number of Referrals

I go into more detail about this in the post How to Increase Net Profit On Marketing By 225% Without Spending Any More On Advertising

The key to all of this is – You must track all these for every traffic source independently.

There is no set traffic source that is better than another overall. Each traffic source in combination with a strategy and offering will behave very differently.

Here is an example of a reporting dashboard for traffic source.

Most marketers will stop at Cost Per Lead and try to get the lowest cost per lead, but you are leaving money on the table unless you have the full picture.

Look at the rows 3 and 6 under the Cost Per Contact and Cost Per Customer columns. The Facebook PPC Cost Per Contact is higher than the Google PPC Cost Per Contact, but the Cost Per Customer for Google PPC in this case is twice that of what it costs to acquire a customer from Facebook.

This helps Facebook PPC produce a 439% better return on investment than Google in this case.

Now don’t automatically come to the conclusion that Facebook is the holy  grail, because I have a number of case studies where the numbers are reversed. Every business in combination with target market, offer, traffic source and location will produce different results. Even the time of year impacts results, but that’s another conversation.

Let’s stay focused on the fundamentals that will produce the best ROI.

Do You Know How Much of Your Online Marketing Budget is Being Wasted?

As you may have realised from what I’ve explained, determining specifically where your marketing spend is generating an ROI and where you may be falling short requires an in-depth analysis of your marketing initiatives. It’s a task which very few digital marketing agencies or professionals in Australia have the expertise for.

It’s one of the skills my agency takes particular pride in. If you would like our help and my personal involvement in helping you uncover the leaks in your digital marketing, I welcome you to contact me.

It’s just what you may require to obtain clarity on how effectively your marketing budget is being spent and how you can ensure the ROI for every dollar marketing dollar invested in the future can be tracked.

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  Samuel Junghenn  /    July 25, 2017  /   Internet Marketing Entrepreneur  /   0 Comments

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