Imagine you had a magic money machine.
It accepts $1 coins and bills.
Every time you feed it $1 it spits out a $10 note.
How many $1 would you feed into it?
As many as you could get your hands on?
or would you think hmmm.
“I’m going to take 10% of my money and feed it in into the magic money machine”
I would feed every $1 I could find into it then I would change most of the $10 notes into $1 a start again.
I would maintain the machine so it was in perfect condition, oil it, grease it, treat it like my baby. It would not only give me 10x return on the money I was feeding it but it would give me leverage that would give me time to do other things.
This fictional machine isn’t actually fictional – it’s another name for a marketing system.
A properly setup marketing system allows its owner to feed in $1 and get a predictable amount of money and results out the other end.
If you had one of these why would you have a ‘marketing budget’?
The Problem With Marketing Budgets
Setting a budget for your marketing looks like a sensible thing to do. Cash flow is the life blood of any business and if you run out you’re gone. But the problem with allocating a percentage of revenue or a fixed amount is they are inherently fixed.
If you find an opportunity to turn $1 into $10 you are naturally limiting those opportunities. Most businesses do go all in on this channel as it’s not ‘in the budget’ and fear sets in. In a perfect world spend would be attributed to this channel until it showed a significantly diminishing return.
To get any confidence around this you must know your numbers intimately.
The Stair Step Method
Let’s assume you are focused on a first time conversion rather than a high lifetime value. ie you only sell customers a product once.
Here’s a better way.
First you need to establish your benchmarks so you can measure what you’re doing.
There’s 4 key metrics you want to pay attention to.
- Revenue From Campaign – Found by looking in Google Analytics – Acquisition>Campaigns>All Campaigns
- Campaign Spend – Self-explanatory
- Average Order Value by Campaign – Found by looking in Google Analytics -Acquisition>Campaigns and click on ‘Ecommerce’ above the graph.
- Conversions from Campaign – Found by looking in Google Analytics – Acquisition>Campaigns>All Campaigns
To make this easier I will use real numbers:
- Revenue From Campaign – $10,000
- Campaign Spend – $1500
- AOV for Campaign – $100
- Conversions from Campaign – 100
So we have established a cost of sale for this campaign of $15 ($1500 / $100) or 15%. For most categories this is an acceptable number.
So what next?
Spend more money.
Start with a 10% bump in spend.
What does it do to your key metrics?
If they stay the same “stair step” your spend up in 10% increments.
If your key metrics start to fall off then you have reached the limit of that campaign in it’s current form.
I’ve found in most categories providing your customer pool is big enough then you can increase your budget significantly before key metrics fall off.
Congratulations – you have just grown your sales.
In todays environment of cheap and easy credit you can also liquidate your ad spend before you even have to pay for the ads. But that’s a post for another day…