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Let’s say I work for Brand X and I want more people to buy my product. What do I do? Well I want people to know about me, so I buy online ads (because digital is all the rage) and now everyone hears about and sees my product, sales go up and everyone is happy! Right?
There is a saying in marketing attributed to James Wanamaker which says ““Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”. That’s the problem with the above approach. It may have cost you X thousand dollars to run a large marketing campaign, which did make sales go up by a certain percentage, but could you have achieved that same percentage growth if you spent half or even a quarter of that amount? The answer is probably yes, if you use the performance marketing approach.
I’m been working in Digital Marketing full time for the last 6 years, and I’ve seen a lot of techniques come and go. However, the one framework that I found that when applied successfully can lead to enormous positive impact for any organization is Performance Marketing.
First of all what is performance marketing? Performance marketing is basically marketing with the goal in mind to target “performance” of goals that lead to business growth by the way of calculating conversion rate. This involves the following steps:
In the first step of this process, you need to define what are the goals of the business, and then see what are the Digital Goals that lead to that business goal being achieved.The 2 steps in this process are:Business Goals: Are goals that allow the business to succeed, primarily from a revenue / transactional point of view.
Digital Goals: These are the actions / events on the website / app that you want to track that lead to a business goal.
Let’s go over this process for 3 types of businesses (based on what I’ve seen training dozens of companies these are the 3 most common examples).
Example 1 eCommerce / Online Sales
Business Goal: Getting more sales on the website.
Digital Goal: Getting more people to add products to their cart, checkout and place their order.
Example 2 Service Based Consultancy or B2B
Business Goal: Getting more sales, customers or clients.
Digital Goal: Getting people to contact you, fill out an online form to enter their details or click to call from the website.
Example 3 Offline Retailer / Franchise Operated
Business Goal: Getting more people to buy more products in the brick & mortar physical store and 3rd party websites.
Digital Goal: This one is a bit trickier, as often times brands don’t have full control over their digital assets (especially in the region where they often operate as a franchise of a global brand). In this case though, for our digital goals we can focus on: 1) Driving people to click the location map to get directions 2) Letting people know about offers, and get their details (enter their email / phone number) 3) Drive people to third party website (B2c website then shares their sales data with you)
Once you are calculating your Digital Goals, the next step is to calculate your conversion rate. This allows you to see what percentage of your visitors are completing your Digital Goals. The simple formula for this is:
For example, if you bring 100 people to your site, and 2 of them buy something (complete a digital goal), then your conversion rate is 2/100 or 2%.
The next step is to calculate your CPA or Cost Per Acquisition. This is the amount of money you have to pay to get one conversion.
The forumla for CPA is:
If we take an example, let’s say that I spend $200 on marketing and I got 4 people to buy from me. If purchases are my goal, then my CPA would be $200/4 which comes to $50.
So are we done yet? Sort of. The only step left is to see if what we’re doing is effective. This can be done mainly in one of two ways:
1) Direct Profitability: This is where we see if our CPA for our marketing is in line with our profit margins. Let’s say I’m selling a bag that cost me $10. If I sell it for $100 and my CPA for marketing it is $20, then I am within an acceptable range of profitability, so my gross profit in this case will be $100 – ($10+$20) = $70. Of course this doesn’t account for other costs like shipping, operations, salaries etc. but it’s a good start.
2) Customer Lifetime Value: In some cases, if your business goal is to build loyal customers for example, or if you have a recurring subscription model, then you may need to look at something called the Customer Lifetime Value. This is a wide topic on its own, but to briefly define it, Customer Lifetime Value is how much projected revenue or gain you expect to get out of a customer in their entire lifetime as a customer (which would be years).
Let’s take an example of this. Let’s say that I work for Netflix and I want to drive more people to sign up for the service. If the cost of a Netflix monthly subscription is $10 a month, and my CPA is $20, you might think this is bad, since my direct profitability is $10-$20 = -$10. So we’re in the red. However, if you know that a normal Netflix customer will stay a customer for let’s say 2 years, then that means that the actual value of that customer is 24 months (2 years) multiplied by $10 or $240. So in our case, profitability when looked at from the Customer Lifetime Value point of view is actually $240-$20 = $220. Not bad!
The final stage in this process is either to Scale Up if it’s working, or if it’s not working to Pivot or try a different (different channel, different campaign, different targeting method etc.).
I hope you enjoyed this short intro to our Digital Marketing Strategy! If you find this interesting, I recommend you check out our upcoming in-person Advanced Digital Marketing course, in which we’ll go over advanced topics like Performance Marketing, Programmatic Ads, Influencer Marketing, Growth Hacking and more!
Great Article! It details the most important metrics to monitor in the digital world. Couple of things that, I believe, will further strengthen your first point – Defining Goals is a most important step in the whole process and as you rightly mentioned, one needs to make sure that digital goals should be well aligned with the business goals to reap out the benefits from digital channels.
Apart from defining the goals, we also need to define the timeline of execution of the strategy. Digital goals can be both tactical (eg. what should be my CPA per quarter, QoQ comparison) and strategic (eg. how is my CPA as per industry benchmark or over the year, YoY comparison) in nature. Defining proper timeline and intermediary milestone gives us more control over the execution strategy. I believe its more agile way of working where one can depict the pitfalls and take proactive measures.
Please share your thoughts.
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