Last year I heard a business partner of ours, David Deppner, say something both startling and incredibly insightful at a conference. David is cofounder of Psyberware, an ad management solution for Magento merchants, and his company (among other things) helps merchants drive efficiency in their paid search campaigns. So when he said, “budgets are for CFOs, not paid search campaigns,” I sat up.
Some context: the discussion at the moment was focused on customer acquisition, and David noted that every marketer is eager to achieve specific customer acquisition costs (CAC) and ROI, and to that end put limits (i.e. a budget) on paid search. This doesn’t really make sense.
Look at it this way: If you knew that every dollar you put into the bank grew into three dollars in six month’s time, wouldn’t you keep depositing your money there? This is paid search. It’s the investment that keeps on growing.
More than that, paid search is all about growing your top funnel. Unlike remarketing or retargeting campaigns, paid search is focused solely on customers to your brand and ecommerce store. Spend a dollar acquiring them and you’ll get your dollar back in the first sale, and additional dollars when they return.
True, many retailers, particularly direct-to-consumer brands, face high customer acquisition costs. But they also have high retention and loyalty rates, which directly translate into repeat sales, which justifies the higher margin they’ll need to pay to capture the customer initially.
I’ll give you a concrete example. Let’s say you’re a shoe brand and one of your evergreen products is a $138 pair of leather sandals, and your average order value is somewhere between $110 and $120. Spending $40 to $50 to acquire that customer is quite reasonable given that you will probably make 25% margin on those sandals. When all is said and done, you’ll get a respectable $35 from the initial transaction, but that’s just the first benefit. Customers you sell to are 60% to 70% more likely to purchase from you again, and many are likely to recommend your brand to friends and family.
Unfortunately, far too many retailers view paid search as an expense to be controlled and capped, and not as an investment in building the top of their sales funnel, and ultimately the future success of their businesses. Assuming you’ve built a smart strategy and have partnered with the right companies, in theory you should have an unlimited pool of money at your disposal for your paid search campaign. By this I mean, for every one dollar you put into paid search, you stand to add two to three dollars in future sales revenue.
So why do retailers have budgets around paid search spend? Now a cynic may say this is rather self-serving, as Something Digital is a digital marketing company and probably doesn’t want to work within a budget, but that’s not the case at all. We certainly wouldn’t recommend that any company spend more on paid search than it has in the bank. What we are saying, however, is that most budgets allocated are on an accrual basis, in the same way that PTO is accrued by a full time employee. But that’s not how marketing spend should align.
An intelligent approach is to plan how you are likely to spend your marketing budget over the course of the entire year and to know upfront when higher paid search costs are likely to deliver higher dividends. Case in point: gifting holidays provide the opportunity for retailers to gain up to three new customers from a single customer acquisition. This means if your AOV is $110 and you spend $60 to $70 in paid search, your ROI is lower the first sale, but much higher when you consider $220 from two new customers you didn’t need to pay for. Abiding by strict CAC (customer acquisition cost) and ROI goals during peak gifting periods means you miss out on this upside.
To CFOs, budgets are tools to track performance and assess whether or not the company is investing in the right technologies, processes and market sectors. Without it, CFOs have no real way of knowing if they can meet their financial commitments and responsibilities. That’s not the marketers role.
The marketer’s job is to strike while the iron is hot. When you impose limits on customer acquisition, you needlessly limit the maximum amount of performance you can drive in a calendar year. This isn’t the best way to approach marketing. If Allbirds had taken that approach it wouldn’t be a unicorn (valued at $1 billion) today.
That’s why every marketing budget should offer flexibility to adapt with the demands of the marketplace. It is, after all, the future of your company, and you shouldn’t put a cap on its long-term success.
Written by: Phillip Jackson, Ecommerce Evangelist