Is Your Digital Budget Big Enough?

At a high level, 2014 has been a year of questioning the productivity of digital marketing and related measurement of success.  For example, the most frequent C-level complaint about digital is not having a clear understanding of bottom-line digital impact. For background on this topic, see articles herehere, and here.

I’d guess this general view probably has not been helped by the trade reporting on widespread problems in digital ad delivery and accountability systems, where (depending on who you ask) up to 60% of delivered “impressions” were likely fraudulent in one way or another.  People have commented on this problem for years; why it took so long for the industry as a whole to fess up and start taking action on this is an interesting question!

If the trends above continue to play out, over the next 5 years or so we may expect increasing management focus on more accurately defining the contribution of digital – as long as management thinks digital is important to the future of the business.

If the people running companies are having a hard time determining the value of digital to their business, the next logical thought is marketers / analysts probably need to do a better job demonstrating these linkages, yes?  Along those lines, I think it would be helpful for both digital marketers and marketing analytics folks to spend some time this year thinking about and working through two of the primary issues driving this situation:

1.  Got Causation?  How success is measured

In the early days of digital, many people loved quoting the number of “hits” as a success measure.  It took a surprisingly long time to convince these same people the number of files downloaded during a page view did not predict business success ;)

Today, we’re pretty good at finding actions that correlate with specific business metrics like visits or sales, but as the old saying goes, correlation does not imply causation.

If we move to a more causal and demonstrable success measurement system, one of the first ideas you will encounter, particularly if there are some serious data scientists around, in the idea of incremental impact or lift.  This model is the gold standard for determining cause in much of the scientific community.  Personally, I don’t see why with all the data we have access to now, this type of testing is not more widely embraced in digital.

In drug testing, the “placebo” or sugar pill is used to create the time-locked baseline (called control) for measuring outcomes versus the test group taking the actual medicine. The difference in outcome, the incremental impact, is attributed to the medicine – since all else was equal.  Causation found.  Note this is a similar idea to the A/B test, where people are given different treatments at the same time.  But it’s not the same; in controlled tests, one group is not treated at all.  Controlled tests reveal a different set of behaviors, in particular for engagement metrics / predicted actions.  This new knowledge set has the potential to generate much more accurate definitions of causation and financial benefit.

If you would like more information on this idea, check out this explanation from the Think with Google effort here under item #4.  You may also know this idea from hearing about use of control groups, more here.  Where possible, given your tools and business model, perhaps now would be a good time to try out this more durable and reliable approach to measuring the success of digital marketing efforts.  What is the next level you can attain in the success measurement area, what new discoveries can you bring to the table?

2.  Got Alignment?  The definition of success

Once we get the analytical side on track and start using causation as the standard for the measurement of outcomes, we have to make sure the metrics we are using to define success are aligned with owner / C-level goals.  What should be measured using the causation standard?  For example, is it true that the owners / C-level execs really define success as “sales” in your company?  Perhaps at one point early on, using sales to measure success was the fastest, most logical solution.  And now, bonus structures and company culture have evolved to support sales as a success metric.  Changing all this would be a challenge, to say the least.  But are we doing the best we can do?

What if the C-Level actually would prefer the digital business to be optimized for a different metric, the one they really pay attention to?  Are you sure the preferred metric is not net sales (after discounts and returns), gross margin (after cost of product), contribution to overhead (after variable marketing and processing costs, including fulfillment), cash flow (however your company defines it) or some other metric?

Changing all this will not be easy, but the challenge with continuing to embrace sales as the metric to optimize for – particularly in retailing – is twofold:

a.  Using sales as the success yardstick likely severely distorts the hard money (net cash flow or profit) contribution of the digital effort.  This misalignment nurtures the C-level issue of not understanding the contribution of digital to the company as a whole

b.  More importantly for you, it’s likely that in several areas of the company, the estimated net financial contribution from digital is being used to set budgets.  The problem with this approach: Finance likely lacks the proper tools to determine the true financial contribution of digital; lots of cash creation may end up being hidden from their system

It’s up  to you to provide the analysis / data Finance needs to create a complete picture.

Often, the result of a. and b. above is what I call “can’t hurt us” budgeting – as long as the company keeps digital budgets below a certain threshold, if digital is a mess in terms of the metrics that really matter to the C-level, the company will still be OK.

To circle back to the top of this article, when C-level folks say they do not have “a clear understanding of bottom-line digital impact”,  you can bet some version of the “can’t hurt us” approach to digital budgets is being used.  If you would like prove to the C-level what the bottom-line contribution of digital efforts is, and open the door to bigger budgets, consider exploring the ideas above.

Standard(s) Time

In terms of maintaining C-level credibility, at some point if the core financial needles are not moving then the marketing or measurement story being told must not be relevant or accurate – regardless of what is going on with “sales”.  If C-level people do not understand the financial impact of digital to their company, then it’s probably time to bring the established scientific standards for the testing and measuring of marketing success to at least some digital marketing activities.

The good news lurking behind all the above is this: it really is pretty easy to get started and begin to prove the case for moving in this direction.  You do not need giant infrastructure projects, 360 degree views of the customer, or anything like that to gain valuable insight; we’ll be covering the “how to” over the next several months right here on the MP blog.

In the meantime, if you’re interested in poking around these ideas on your own, here’s a pretty good place to get started.  If you want to go deeper, here are some more detailed examples on Campaigns, Visitors, and Customers.  If you’re on the Finance side, here’s a book on this topic from the CFO perspective, which (surprisingly?) aligns quite closely with the customer-centric marketing view required to move up to the next accountability level.

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