Deciding where to invest your marketing dollars


Where should you invest your marketing dollars?


By: Keith Aichele, Misaic
Have you ever asked yourself “Where should I invest my marketing dollars”? With the rapidly increasing channels available to reach consumers, how do you decide where to spend your limited marketing budget? Should it be Facebook, Google AdWords, Craigslist, Groupon, direct mailers, yellow pages, magazine ads, or something radically different? With consumers shifting how they interact with media, how do you stay ahead of the curve, make the right decisions and maybe even out market your competitors?

I can’t tell you how many small business owners have asked me this question. Everyone wants to find the magic bullet that’s going to get people flooding into their business. So, how do you determine which marketing activities are most optimal for you? The answer is simple…track them and compare. I know that sounds obvious, but I’ve found that the majority of businesses either don’t track/measure their marketing activities, or they don’t spend the time to assess the tracking they are doing.

Even if you aren’t tracking your marketing activities today, you can begin to capture the right information relatively quickly and easily. And, as soon as you start this process to gather the data and spend the time to assess the results, you will be on a path to maximize your marketing spend by knowing where to invest your marketing dollars.

Now, there are many ways to assess the performance of marketing activities, varying in level of sophistication. I’ll briefly describe two approaches, and you can choose the method most appropriate for your business given your aptitude for complexity.

Approach 1: Basic Response Measurement

 

The first approach I want to discuss is designed to be simple and quick such that any business can start measuring marketing effectiveness. Simplicity comes with a tradeoff of accuracy; but if you’re doing nothing to measure effectiveness today, this will definitely be a positive step forward. Here’s how to get started:

 

    1)

    Simply place a promotion code on each of your advertising channels. Keep a database with each of your marketing activities and the code associated with it. Also, include the cost for that particular activity.

    2)

    Next, be sure to require that customers present the promotion code in order to redeem it. You cannot stop here though. You need to actually record in your database each redemption. Remember to record the sales total for the transaction when these promotions are redeemed.

    3)

    The final step that many businesses never accomplish, even if they’ve completed steps 1 and 2, is to analyze the results. On a regular cadence, at least monthly, review the number of redemptions for each activity as well as the total dollars associated with those transactions.

As you can see, this particular approach should be relatively easy to implement. I need to note here that as you look at sales associated for each marketing activity, the answers are just that…sales associated with the marketing activity. This approach does not actually identify if the marketing activity “generated” those sales. Meaning, is it possible that you may have gotten those sales anyway? Absolutely. But, even if this method only identifies which activities did not have sufficient sales to cover the marketing costs, that’s a huge step forward. See, what you do know by this approach is that any marketing activity that cost more than the sales associated with it did not generate enough sales to make it worthwhile. With this, you can at least begin to determine where not to place your marketing dollars. (I’m going to leave the concept of long term value of a customer out of the discussion here to keep things simple). This knowledge is better than having no awareness at all.

For the activities associated with favorable sales, you could do some basic sales comparisons of periods with and without the activity present. This may help you gauge if the sales numbers for the promotion activity were actually incremental, or at least better than without. Because there are many other factors that could have driven sales
success during the promotional period, it may require more advanced methods to be certain extra sales actually resulted from the promotion. So, you can accept some assumptions and go with this approach, or utilize the next approach and eliminate much of the uncertainty.

Approach 2: Measuring Consumer Behavior

The goal of promotions should be to influence customer behavior in such a way that it improves the long term value of your customer. Therefore, the best way to identify if a promotion is worthwhile is to identify if it accomplishes this objective. Now before describing how to measure this, there are two important distinctions from Approach 1 that must be called out.

First, just because a promotion was associated with sales greater than the cost of the promotion, this does not directly mean the promotion was effective. For example, suppose you ran a promotion for $2 off a commonly purchased item and this promotion was sent out to all of your regular customers. While many of your customers may have redeemed the promotion, there’s a good chance they would have purchased the particular item anyway. Therefore, all you have done is subsidized the purchase they were already going to make.

To resolve this dilemma, it is necessary that you track each of your customer’s purchase behaviors and build an analytic model that helps you estimate the amount of money they are likely to spend for a given period. Then, based on this estimate, you can compare actual spend for a period for each of your customers and compare it against your estimated. Now, based on the promotions redeemed during that period, you can identify if the promotions added incremental dollars compared to what you would have expected in absence of such promotions.

The second distinction to highlight is that promotions do not have to generate more sales than they cost for a given period to be considered effective; despite that requirement in Approach 1. Suppose you offered a promotion that allows your regular customers to take advantage of a new product for free for a given period. Clearly, the promotion is not immediately profitable as there are no sales dollars associated with this promotion (at least for the direct item promoted). However, if that trial results in a customer purchasing that product frequently in the future and increasing their overall spend, then the promotion may have actually been extremely effective. Increasing long term value of your customer is critical to build brand loyalty and maximize your customer retention rate.

In order to accomplish this type of promotion analysis, you must have the processes in place to track your customers’ spending over time, as well as dedicate the time to analyze customer purchase patterns on a regular basis. Additionally, you must design promotional strategies with a clear intent of the type of customer behavior shifts that you are trying to influence. While this approach requires more effort, the rewards are exponential. When you can determine the true effectiveness
of every marketing activity, as well as continually focus on positively influencing customer purchase behavior, your business will reach new levels of success. As a result, you will have little doubt on where to invest your marketing dollars.

In order to measure your marketing effectiveness with this level of precision and accuracy, there are a few steps required to get started:

 

    1)

    Ensure you have systems and processes in place to capture the purchase behavior for each of your customers. If you operate a service business, you may already have this information in place today.

    2)

    Setup proper promotion tracking codes on each of your marketing activities just the same as in Approach 1.

    3)

    Build an analytical model to estimate individual customer purchase behavior for each period. If you don’t possess the analytical expertise to accomplish this, identify an external consultant to help you construct a model that can be automated to support continuous estimations.

    4)

    Dedicate time to review the results of your monthly analysis and set clear strategies for influencing customer behavior. Each of your promotions should be designed for a purpose, with clear targets that are measured and evaluated for success.

Following the steps listed above, you can put your business on track to maximize its marketing effectiveness. In a quickly evolving technological world, with hundreds of possible marketing channels to reach consumers, its critical that you find the best way to reach potential customers before your competition. Whether you follow a simple approach to measure marketing effectiveness as described in Approach 1, or are willing to journey down a more advanced approach in
order to surpass the competition, you cannot afford to let your marketing dollars go to waste. The longer you wait to maximize your
marketing efforts, the more likely it is that your potential customers will land with your competition.

Keith Aichele is a business health expert, author and founder of Misaic, a company dedicated to helping businesses utilize customer analytics to achieve sustainable success. For more information on Misaic or business health monitoring visit www.misaic.com. To learn more on this subject, attend  Stop the Failure: 3 Habits Every Business Owner Must Break to Survive! in Schaumburg this Thursday, June 26 and Saturday, June 28. Click here to learn more.