Does Advertising Success = Business Success?

Digital Analytics / Business Alignment is Getting Better

I recently attended eMetrics Boston and was encouraged to hear a lot of presentations hitting on the idea of tying digital analytics reporting more directly to business outcomes, a topic we cover extensively in the Applying Digital Analytics class I taught after the show. This same kind of idea is also more popular lately in streams coming out of the eMetrics conferences in London and other conferences.  A good thing, given the most frequent C-Level complaint about digital analytics is not having a clear understanding of bottom-line digital impact (for background on this topic, see articles herehere, and here).

Yes, we’ve largely moved beyond counting Visits, Clicks, Likes and Followers to more meaningful outcome-oriented measures like Conversions, Events, Downloads, Installs and so forth.  No doubt the C-Level put some gentle pressure on Marketing to get more specific about value creation, and analysts were more than happy to oblige!

Is Marketing Math the Same as C-Level Math?

Here’s the next thing we need to think about: the context used to define “success”.

In my experience, achieving a Marketing goal does not necessarily deliver results that C-Level folks would term a success.  And here’s what you need to know: C-Level folks absolutely know the difference between these two types of success and in many cases can translate between the two in their heads using simple business math.

Here’s an example.  Let’s say Marketing presents this campaign as a success story:

Spent $20,000, created 1000 new customers who bought $50,000 worth of product
Sales generated = 2.5 x ad spend

It’s very likely at least the CEO and CFO, if not all the C-Level players,  know:

  • Cost of product averages 55% of revenue
  • To process credit card / pick, pack, and ship costs another 5% of revenue
  • Meaning, of each sale, only 40% is available for business use
  • 40% of revenue = $20,000, the same as was spent on the advertising

So this campaign actually generated no positive financial benefit for the company at all – ignoring other costs (like cost of returns) that will make this case even worse.

C-Level thinks: this is a waste of time and money, don’t let them spend too much

This is how a Marketing success can become a Business failure, and why there’s more work to do on this idea of providing clarity on the impact of digital to the C-Level or whatever senior management level you deal with.  Sure, very senior level people probably don’t review individual campaign results, but at some point a roll-up of all the individual campaign results will be presented to Senior management, right?

Now, the above example is a very simple one and perhaps for many marketers / analysts in the commerce area a “duh” example (want more complex examples? see the Control Group Series).  After all, we’re not talking about the most robust measure of marketing success – incremental value creation.  But given how often we see ROAS and similar marketing metrics used to define success in case studies, seems like a good place to start!

And for those of you thinking this example doesn’t apply to you because you’re not in the commerce category, trust me, you’re mistaken about that.  Every business has costs related to generating revenues, providing services, and so forth.  For this reason, basing a financial success metric on “sales” is frequently not telling the relevant C-Level story.

Also, many of you are thinking, “But Jim, because these sales were to new customers, and some of those will purchase again, and some of those will become best customers (or donors, or subscribers, or whatever appropriate to your business model), don’t you have to include these ideas in the story?”  And you’d be absolutely correct about that.

Getting Down to Business

Here’s what is important to realize:

1.  The downstream revenue ideas above are not included in the original success story
2.  More importantly, the C-Level folks are likely aware of these concepts but don’t know specifics so can’t easily run the math in their heads to create their “need to know” number

Which is pretty much the point of this post: why would you ever want the C or V-level people to have to run these numbers in their heads?  Why not just give them the information they need to know to validate the outcome from their perspective?

For example:

– On average, this batch of new customers will each generate $20 in sales beyond the first purchase transaction in the next 12 months (based on past customer behavior)
– This adds 1000 x $20 = $20,000 in sales to the campaign = $70,000 on a 12 month basis

Here, you can leave the C/V-Level folks to do their kind of math and determine business outcome.  Or, if you’re a bit more tuned into the thought process at this level, you add:

– Taking into account 40% of sales flows to the business, $70,000 x .4 = $28,000
– Since we spent $20,000 on the campaign, we created $8,000 for business use

More than Metrics at Stake

C-Level people now run a completely different kind of math in their heads with this information, math that can have a much greater impact on your team’s future.

Looks something like this:

  • Campaign will generate $8,000 in business benefit in 1 year on $20,000 in spend
  • Company could invest the $20,000 at 3% risk-free and create $600 in 1 year benefit
  • Or, could take unknown risk and invest in software project with projected 20% return
  • Above is crap compared to proven $8,000 return on $20,000 = 40% (on annual basis)
  • This gain is so huge it should easily cover any related costs like product returns

C-Level thinks: do these people have enough budget, I wonder?

Obviously, a completely different C-Level story line.

The exact formulas and numbers the C-Level will use for above may differ by type of business, stage of growth, and so on, but the general thought process is the same – they’re looking for real financial return on the effort to compare with other cash on hand options.

Perhaps it would be worth a chat with someone in Finance to discover the specific approach your C-Level uses to evaluate options for cash on hand?

Enabling this simple bit of additional business math – especially if you are in a Marketing or Analytics management role – does 2 things:

1.  Demonstrates all the way up the chain that the people doing this work really understand the business – so perhaps the work they do should be given more weight
2.  Begins to set a measurement standard that is anchored in the reality of business and can be applied to most marketing and many other types of customer-centric investments

Now, perhaps you’re thinking nobody asks you for those kind of metrics; it’s not your job to get into the business side of measuring outcomes.  Fair enough!

But I can tell you this: there are people in the company who very much care about this approach to success measurement, and those same people are likely to be C/V-Level folks who are deciding about allocating resources for salaries, software, and hardware.  Would it hurt to provide some additional numbers that clarify tangible financial impact?

If you can prove your efforts are creating real business money, it’s easier for management to say yes to spending more on budget, staff, resources, whatever it is that you need.

The marketing success math is good enough for marketing folks to decide which campaigns should be allocated more resources within the budget for marketing.  But it’s not good enough for management decisions to be made on allocations between budgets for several different functional areas or divisions of the company.

My advice: don’t let the C/V-Level folks run their own math, and maybe honestly misinterpret the real financial contribution your team is making to the business.

Do the (business) math.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.