Pear Analytics

Amidst the worst financial crisis since the Great Depression, companies are slashing jobs, slowing growth and cutting costs. One of the first costs to get cut are usually in marketing and advertising.

Marketing in a down economy requires you to measure the performance of each campaign.

The problem is the direct correlation between marketing and advertising efforts, and your sales needle. Companies are pressured to cut costs, yet maintain or grow sales, even in down economies. They are going to be forced to do more with less, and be more efficient with spending.  Well, the reality is that you should be doing that anyway and your agency should be helping you achieve better marketing performance.

Are you measuring the results of your marketing and advertising efforts? What if you end up cutting something from the budget that is working? The concern is that companies are widely slashing efforts with high acquisition cost, cutting loyalty and reward programs – all of the things that could be producing the best results.

We recently wrote a post on measuring the lifetime value of the customer, and here is another example of how we can use this kind of data to make these crucial decisions.

In the simplified example above, we look at four different types of marketing channels.  Each has a varying cost per acquisition (or the cost to get a new customer), and we assume that each new customer channel contributes the same net margin per month over varying tenures  (a.k.a. lifetime value of the customer).

If you are not measuring cost per acquisition and lifetime value (LTV), you may be quick to decide to slash the efforts with the highest costs – in this case everything except direct mail.  This is precisely why we like to compare each of these using the Effectiveness Ratio, which is defined as:

Effectiveness Ratio: Value / Acquisition Cost

where Value equals Net Contribution Margin/Mo. times Tenure.

We can quickly see that eliminating paid search would be a detriment to long-term sales.  If we had to cut costs, perhaps we should cut public relations and direct mail in this example.  Also, I am not discounting the sheer number of customers that each channel produces either, hence this is a simple demonstration to point out the importance of marketing measurement, and the types of measurement you should be making.

I’m Not Measuring This Way – How Do We Get Started?

There are some basic data capturing mechanisms you can use to get started on the path to better marketing performance.

1.  Track the source of the sale. Having your front desk attendant asking “how did you hear about us” may not be the most accurate way of measuring leads, so we use software applications to help track the lead all the way to a sale, such as Salesforce.com, or if you want to control the software on your server, you can download a free version of Sugar CRM.  Also, use things such as dedicated 800 numbers or unique website URL’s to segregate promotional offers on print or broadcast channels.  Online advertising continues to be the easiest to track and one of the most cost-efficient channels to producing sales.

2.  Track Spending Per Channel. Track your spend on each campaign effort separately.  Ask your agency to breakdown the costs of direct mail, paid search, and other things rather than sending invoices with general “agency fees”.  Agencies markup media buys, including online buys, so know what they are and how it affects your ROI.  Now that you have your campaign costs and leads broken down into each channel, you can now effectively track ROI and cost per acquisition.  This will factor directly into your net contribution margin and should be subtracted from the revenue earned from sales.

3.  Track Customer Spending – use your CRM system, or if you are a retail organization, your POS system to track customer spending.  Try to uniquely identify the spending by customer ID or email, rather than just by store location or geography.  This gets you to the additional granular detail to further segment your data later by usage and spend, and can do wonders in your lifetime value calculations.  We can also develop patterns to help re-tool marketing efforts by being more relevant and targeted.  From this data is where lifetime value calculations are born.

Are you ready to roll up your sleeves to track the right data and get lean and efficient in your marketing?

3 Comments »Tags: better marketing performance, cost per acquisition, lifetime value, LTV, marketing performance tracking

Today we are going to discuss how to measure Cost per Acquisition, which is a fancy way of saying “Cost per Sale”.  If you are like most companies, you probably have several marketing promotions going on across multiple channels. Maybe what you have is some online pay-per-click (PPC), organic search engine optimization (SEO), direct mail and radio.  Good marketing requires that we know and understand what sales are costing us from each channel.

Well, how do you know how much you are going to spend in each marketing channel?

The fact is, most are guessing. In order to properly assess what you are going to spend in each marketing channel, it is necessary to understand what you are willing to spend to acquire a new customer (cost per acquisition), and ultimately, the lifetime value of the customer.

Wait, what is “lifetime value of the customer”?  That is the net dollars a customer is worth to you from the moment they become a customer to the moment they are no longer a customer.  We will talk about this in much more detail in a future blog.

But for now, let’s say that the lifetime net value of a customer is $1,000 so I can illustrate how to use this to back into your cost per acquisition thresh hold. Now, depending on the type of company, margins, and a few other factors, the general rule of thumb is to allocate on average, 15 percent of the customer lifetime value to acquisition cost. This means for this example, we are willing to spend $150 to acquire a new customer from any marketing channel.

How To Measure Cost Per Acquisition

Great! Now, that was the easy part. The hard part is setting up each campaign to be able to track leads and acquisitions by source because we want to make sure we are not exceeding our cost per acquisition thresh hold. This is where everyone falls apart, because it takes process, training, leadership, dedication and the proper tools to do this. We can express cost per acquisition in a fairly simple equation:

You can get as detailed as you want on what “total campaign cost” means to you in terms of labor, graphic design, ad expense, printing, mailing, etc., but the most important thing is that you break it down by individual campaign. Keep in mind that your cost per acquisition may be quite high in the beginning as you front-load all of your set-up fees. Those will get diluted as the campaign starts to generate leads and sales over time.

OK. We’ve determined what campaigns we’re going to run, how much (roughly) we should spend to acquire a new customer ($150) each. How much money should we allocate to each campaign? Honestly, it will be an educated guess until you are tracking leads and sales efficiently to really know the answer to this. But let’s look at a direct mail example.

Direct Mail Example
Many companies purchase mailing lists based on a set criteria for demographic, household income, and some level of intent to purchase. Most direct mail campaigns I’ve done usually yield a 1-5% response rate, and out of those, a 10-30% convert into a sale.  So let’s make some assumptions for illustration purposes:

• List size:  10,000 names
• Total Campaign Cost:  $20,000 (includes list, design, printing, and mailing)
• Response Rate:  3%
• Conversion Rate:  15%

So based on the above response and conversion rates, we would get 300 people to respond to the mailer, and 45 people to buy (this is our Total Acquisitions in the equation above).  Now we know that our cost per acquisition is $20,000/45, or $444.44, which of course is higher than our initial cost per acquisition threshold, so we need to decide if this channel is feasible moving forward.

Pay-Per-Click Example
Pay-per-click is an online ad buying method where you run some ads on search engines, affiliate networks, social sites and other, to drive traffic to a landing page where you hope to “convert” the potential customer.  Results on PPC will vary by industry and competitiveness, but for illustration purposes, let’s assume the following:

• Total Click-Throughs: 2,500
• Total Campaign Cost:  $20,000 (includes set-up, landing page design, ad expenditures, etc.)
• Conversion Rate:  8%

So based on the above response and conversion rates, out of the 2,500 who clicked on our ad to arrive at the landing page,  200 visitors converted to a “sale”.  Now we know that our cost per acquisition is $20,000/200, or $100, which is $50 less than our initial cost per acquisition threshold, so comparatively speaking, the PPC campaign is yielding much better results than our direct mail example with the same investment, so we could take the funds spent on direct mail and re-distribute them to our PPC campaign.

So there is a basic example of how to measure your cost per acquisition.  This gets to be much harder to measure on traditional broadcast channels, so try using unique URL’s or 800 numbers to capture and segregate leads from various channels.

What are you doing to measure cost per acquisition?  How many channels are you marketing across?

2 Comments »Tags: better marketing performance, cost per acquisition

Why does it seem like results-based or permission-based marketing is such a new phenomenon? The funny thing is that after you explain how the process works, while everyone in the room agrees with the direction, their first reaction is to still go back to the old way of doing things. But they can’t help it. They want to be strategic and results-oriented, but automatically revert back to mindless tactics because it’s what they think works. No one is willing to sacrifice a little gain to do some experimenting and measurement, to eventually get a much larger gain that you would have doing it the “old way.”

The fact is that testing multiple offers simultaneously, particularly online, is easy and cost-effective. If you ran 4 different offers (all things considered equal) to see which one had the better response rate, sure, 2 of them are going to have dismal results at the expense of a few leads – but – you take the 1 or 2 best performers and run those while continuing to tweak performance as you go, and before long, you will have exceeded your results from last year under the non-results approach.

But results-based marketing is alive and well at Pear Analytics. Not only do we get you on the path to performance, we also provide the tools necessary to get there.  Contact us to see how we can help.

No Comments »Tags: better marketing performance, marketing strategy, permission marketing, results marketing, Results-Based Marketing