The blind spot in your online marketing budget forecast

The CMOs and marketing folks of the world love one word beyond all others: budget. The bigger, the better. To say that one managed a $25 million (or $250 or $2.5B, or whatever) marketing budget on a resume opens a lot of doors out there, even if that budget wasn’t managed all that well.

But we’re not here to talk about that. We’re here to talk about how that number comes into being.

Despite our own analyst-y opinions of marketers and their effectiveness or connectedness to reality (we do tend to be hard on these folks), the truth is that a marketing budget is designed to provide a return. That budget breaks down into slices that will individually provide some sort of a return, and the size of those slices is ideally decided by some sort of an investment order, making sure that companies invest in one channel to the point that investing in another channel provides a greater marginal return.

Stop laughing. I know this isn’t how it ever really happens, but just go with it.

I like this metaphor of cups. If I gave you a pitcher of budget, how would you fill the cups?

Chances are, your company is pouring a little budget in each cup. But what if I changed the cups to say the ROI on the side?

Now how would you distribute your budget? Yeah. A little differently, right?

The truth is that you would pour so much water into the 5:1 cup that you’d form a reverse-meniscus on the top as you added incremental molecules of water to get as much in that cup as you possibly could. You would then go on to the 3:1 cup, and on down the line until you ran out of budget.

But we know that ROI isn’t as simple as that. For one thing, PPC doesn’t have a fixed ROI across all keywords. Same for display across your placements, networks, or creatives. It’s more like a diminishing return model. PPC might look like this:

So, your really have cups within cups, to keep the metaphor rolling. Brand keywords will provide high return, then some other keywords, then others, and on. And it’s truly analog: no group of keywords has a real “ROI,” instead it’s cups within cups within cups…

Forecasting Budget and ROI

So, if we know approximately how much demand there is in each cup, and we know approximately what the cost of filling each cup is, then we can forecast out to a blended ROI we’d like to hit and know how much we can spend to maximize our reach, right?

NO.

Because you’re forgetting something really big here: none of your keywords, campaigns, creatives, placements, email lists, social media followers or fans, or anything you do has a set intrinsic value. The outcome of every single thing you do to bring people to the web site depends completely on the web site itself.

Don’t believe me? Turn your site off.

Just because one keyword (apples) performs better than another (oranges) doesn’t mean that “apples” people are any more conversion prone or valuable as human beings. What it most likely means is your business is better set up to help the apples folks today. The oranges crowd could very well be your bread and butter tomorrow, if you make changes to your site (or other things) to improve that experience.

So, what does that mean for the cups?

It means that each cup actually has a much higher intrinsic value (if there is a limit), and that intrinsic value is held back by what you offer (also, the cups are resized to reflect available demand). Have a bad user interface in your product details and cart pages? Subtract ROI. Have unclear navigation? Dollars out of your pocket. Do you suck? Cut that ROI into a fraction.

So if we remove these obstacles, we can improve return immediately across all cups. In terms of our paid search, this is an amplitude shift. Every time we improve the site, we improve the ROI of every single keyword (or any other marketing channel) we have. Every one.

So, the blind spot in our budget forecasts is we are ignoring the potential for this amplitude shift. Instead, marketers spend their time looking for the next magic bullet. The next pool of audience that’s untapped. The next $500,000 of budget that can be spent at their target ROI, assuming everything else stays the same.

But everything else doesn’t have to stay the same. Spend that $500k on your site, and you can stand to improve the value of every single dollar you’re already spending on traffic and audience generation.

If your agency or marketing department gives you a target budget, ask them where it came from. What assumptions were made about conversion rates, average cart size, ROI, etc.? What could the budget (and revenue / cash flow) be if you could improve your conversion rate by 20 basis points (0.2%)?

I’m betting the answer will wow you. And that $500k will go to a better home.


1 Trackbacks

  1. […] * Shifting your budget allocation based on distribution of historical ROI values is a highly unsophisticated long term strategy (fine in the short term) because it fails to consider the impact you can have on ROI by delivering better messaging and a better experience (read more). […]

5 Comments

  1. Josh B

    Good read, and great metaphor used. However, I do think there’s a bit of contradiction in the post. You start out talking about how marketers want to protect their budget for their own respective reasons. But then you get into the POV about putting the dollars in the right place (funnel optimization) which I agree with. But… Knowing that the “Funnel Fillers” and the “Funnel Fixers” are generally two different groups with two different budgets, it’s hard to get “the right thing” done for the same budgeting reasons that you started out with.

    But overall, love your direction here. We all know analytics is the bridge between Marketers/Advertisers and Developers/IT. Would love to see you post some thoughts on how we can begin to hold Development/IT teams accountable for business results, not just making sure everything is up and working properly.

    Posted May 19, 2011 at 2:49 pm | Permalink
  2. Josh (whoops! Said John the first time):

    Thanks for bringing this up. Great point to ponder.

    I see it a little differently, maybe looking a little more long term. I guess the point I was trying to make was we should ask ourselves: what could that budget be if you freed yourself from the intrinsic value model? If we realize that the diminishing returns curve is not fixed, but that it could move, it gives us the ability to radically re-adjust our ability to spend and generate return.

    If we spend some money on improving site experience and what we provide to visitors, we can either generate a higher ROI at a level spend, or we can generate greater volume at the same ROI. Both scenarios are ones companies love, as both generate generate greater cash flow. This is good news for the CMO who wants to manage a larger budget, or who wants to see greater success from their existing budget.

    Now as far as analytics as the bridge between those two parties, I’d like to hear more about what you think there. I don’t know that I see it as a bridge, really, unless analytics [wrongly] lives in IT as it has for so long. But that doesn’t change the truth you speak: those teams should be held accountable to business results. I think the only way we can get there is by giving them more creative freedom, rather than the paint-by-numbers approach many companies take today.

    Posted May 19, 2011 at 3:58 pm | Permalink
  3. Josh B

    I appreciate the clarity on the point you’re trying to make. I guess the point I was trying to make was that making the rational, long-term decision is unfortunately easier said than done. I’m absolutely supportive of spending more in onsite experience optimization. Many companies with whom I’ve worked operate in silos (that’s not breaking news). The marketing “funnel fillers” don’t interact often enough with the “funnel fixers” in IT, Creative and elsewhere. And often, I’ve seen that Marketers are held accountable for business results, but the IT folks aren’t held accountable for the impact they contribute/inhibit.

    So when I say “analytics is the bridge”, I’m trying to say that analytics is the central nervous system of any data-driven organization, and we have a responsibility to leverage quantitative and qualitative analyses to break down those barriers.

    Posted May 20, 2011 at 9:38 am | Permalink
  4. Evan, you are stuck in the trees. You need to look at the forest, if that is possible. You assume the marketing budget is all about digital and that is simply not true. Most of it is TV, radio, print, all that so called “offline” stuff. You seriously need to buy a plane ticket and fly out of LALA land.

    Now google the word “Marketing-Mix Modeling”.

    Posted June 4, 2011 at 11:36 am | Permalink
  5. Michael,

    The post is only about online marketing. Maybe you need to buy a plane ticket to somewhere they sell glasses.

    Of course there is more to the world. I could say the same to you. After you get those glasses buy another plane ticket to where operational budgets are set, of which only a small part is your marketing grove of trees.

    Maybe you can find a way to be more constructive.

    Love,
    Evan

    Posted June 4, 2011 at 1:46 pm | Permalink

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