At this particular moment (I’m writing this in December, 2017), it’s very likely that if you’re a merchant, about the last thing you want to talk about is marketing for next year. No doubt you’re still recovering from Black Friday/Cyber Monday and you’re in the throes of pre-Christmas campaigns.
So are we, as we manage the marketing for several clients.
Nevertheless, 2018 is almost here, and, as we’re doing with many of our clients, we’re already laying the groundwork and crunching the numbers for next year’s marketing campaigns.
It Begins with the Numbers
If you’re a small-sized merchant in terms of personnel, it is sometimes challenging to get your hands on the numbers and metrics that will help you make responsible, profitable marketing decisions. Without an accounting department — and without an accounting or data management background — many merchants base their marketing efforts on assumptions, gut instincts or just sales revenues. And while we often support intuitive decision-making, we put even more weight on fact-based planning.
We discussed in an earlier post the 5 most important metrics in eCommerce. That particular article has been shared hundreds of times because it does help focus your efforts toward the numbers most key to measuring performance. They should be often reviewed to see if you’re truly expanding your business both in terms of sales and profits.
For marketing planning, though, we want to focus on 3 key numbers: revenue goal, marketing budget and ROI.
Arriving at a projection of revenue for the next 12 months is often considered an exercise in either futility or wishful thinking. Yet, without a goal for gross earnings, you have nothing on which to base your budgets for all aspects of your business.
When we counsel a client, we suggest they derive their projections by answering the following question: “by how much can you increase your resources in overhead, personnel, marketing, and other non-cost of goods expenses?” For some small merchants, this is also a question of how much additional time can they spend in their online business.
A common response, of course, is “well, if our sales go up, we can spend more.” Yes, that is true. However, our question is best answered without consideration for increasing sales: based on your available resources today, by how much do you think you can augment your operation?
If you feel you could invest 10% more in your operational costs and personnel for next year, then you should base your minimum growth expectations at 10%. If you close out the year with $10,000,000 in sales, then by adding 10% to your operation, you should reasonably assume you can increase sales to $11,000,000 for next year, all other things considered. Of course, this is never a direct one-to-one relationship. The point is, though, that if you want to grow sales by 10%, you should be prepared to increase your overhead by 10% to handle the additional sales volume, advertising, etc.
If you want to shoot for the moon and double your sales, are you prepared right now to spend 100% more on your non-product costs? Assuming, of course, that it’s even possible to obtain the additional market share necessary for such growth.
By whatever methodology you employ, setting, visualizing and committing to a firm revenue goal is a critical first step.
Assuming that you will be continuing with similar marketing efforts as you did this year, it’s at first reasonable to assume that if your Revenue Goal is an increase of 10%, your marketing budget should go up by 10%. However, that is not quite the case.
Increasing your sales volume requires gaining new sales from two sources: existing customers and new customers. Ideally, increasing sales from existing customers is the more efficient source, but if your products don’t easily lend themselves to repeat business each year (e.g. pianos, home security systems), new customers will be more important. Conversely, many products are ideal for repeat purchases, such as apparel, travel, office supplies.
Therefore, deriving a marketing budget can be a tricky matter. We’ll give you a formula you can use to help arrive at the ideal budget, but, first, you’ll need to gather or calculate some core values:
- Cost per Acquisition (COA). What did you spend this past year to attract each new customer to your store? To calculate this figure, take the total amount spent on PPC or other advertising (e.g. AdWords, Facebook Ads, print, television, etc.) and divide by the number of sales generated from new or first-time customers directly attributable to your advertising. If you spent $50,000 on advertising to generate 1,000 sales, then your Cost per Acquisition would be $50.
- Cost per Repeat Sale (CPRS). Your efforts to have prior customers buy again from you are usually focused on email and social media campaigns (not including ads in Facebook or other social media). Take the total cost of these campaigns and divide by the number of sales from prior customers who responded to these campaigns. It should be quite a bit lower than the Cost per Acquisition, but can be more than you may realize. We find very few merchants ever calculate this number, assuming that sales to their existing customer base is virtually free of marketing costs.
- New vs Repeat Sales. Next, discover the percentage of marketing-driven sales that were to new customers versus returning customers.
Now, if you haven’t realized already, you’ve calculated marketing costs based on the sales directly attributable to your marketing efforts. This does not include customers who have come to you via organic searches or inputting your site URL directly into their browser. It also does not include affiliate marketing efforts, if any.
However, if you want to grow your sales, you should assume that all of your new sales will come from your marketing campaigns, not from the passive sources. Of course, you may well get new business from search engines and referral sites, but that should be considered gravy.
So, how much more in marketing will you have to spend to obtain 10% more in sales? Let’s consider a hypothetical example:
- $10,000,000 in annual sales.
- 40,000 orders (averaging $250 each).
- A target goal of $1,000,000 increase in sales for the next year. You’ll need 4,000 new average orders.
- 2,000 orders from new customers generated by spending $25,000 in advertising (COA = $12.50).
- 1,000 orders from repeat customers generated by spending $10,000 in email and social media (CPRS = $10).
- Marketing-driven sales to new customers were 67% versus 33% for repeat customers.
To calculate the additional marketing costs for generating $1,000,000 more in revenue:
Costs = ((4,000 Orders X 67%) X $12.50 COA) + ((4,000 Orders X 33%) X $10 CPRS) = $46,700.
As you can see this amount is more than was spent during the year ($35,000). But, it also represents more market-driven sales, as well (4,000 vs 3,000). Another way to calculate this, for those math prodigies out there, is to multiply last year’s cost by the percentage increase in market-driven orders [ (4,000 / 3,000) * $35,000 ]. However, we like to break out the longer equation so we can play with various “what-ifs” such as emphasizing more repeat customer sales or more new customer sales. By adjusting the percentages, we can derive cost variations.
Someone reading this — and it could be you — is shouting “but we know not all new sales will come from paid marketing!” That’s true. If you wish to obtain fewer “paid” sales, you can reduce the number of orders in the formulae. Organic growth is not a sure thing, however, whereas sales driven from marketing can be more reliably predicted. That said, if your growth prediction is in line with the growth levels you have experienced in previous years, then it is acceptable to assume that a similar percentage of new sales will come from organic channels. If, in our example, you feel confident that one-half of the sales growth will be organically-driven, then your marketing budget can be halved; if organic will drive three-fourths of your sales, growth, you can reduce by 75%.
Calculating a return on investment can get quite complex, as your accountant can attest. For our purposes, we want to know if the marketing costs we will spend will produce an acceptable return of profitability.
First, we want to take a general, high-level look at the ROI of our proposed marketing budget. Let’s assume, based on our example criteria, that 50% of our projected sales growth will be organic. Our projected marketing budget is, therefore, the $35,000 we spent last year, plus an additional $23,350 for a total of $58,350.
If our Gross Margin on the products we sell is 35%, our $250 average order value yields an average profit of $87.50. For our projected sales goal of $11,000,000, our projected Gross Profit on products sold will be $3,850,000. If we spend $58,350 on marketing, then the ROI on our marketing efforts is 65.98 ($3,850,000 / $58,350), or, to state it differently, for every dollar we spend in marketing, we should see a return in profit of $65.98.
Now, that is overall ROI on marketing. For only those sales driven by marketing directly, the ROI will be much less, but it is very important to consider. You don’t want to spend marketing dollars on efforts that will not return you a profit (loss-leaders notwithstanding). In our example, we find that our cost of acquiring new and repeat sales is 7 ($87.50 / $12.50) and 8.75 ($87.50 / $10), respectively. As you work through various marketing plans, you want to keep an eye on this ROI calculation. It’s not uncommon — and it may be very acceptable to your purposes — to see ROIs of 1.5 or 2. If you could spend $10 and get $20 in profit, that might be quite a good return in your niche.
In addition to the overall calculation of marketing ROI, you do want to calculate ROI for the various product lines, brands and sources you offer. For example, you may find that the margin for some products are much slimmer than normal and therefore any marketing money spent specifically to attract sales of those products results in a negative ROI. And as you decide on marketing campaigns, you may find that some campaigns return better or worse ROIs based on these product segments.
And just to throw yet another calculation into the mix, the same ROI computations should be made against whatever discounts you offered during the prior year. Did giving buyers a 25% discount coupon deliver a positive ROI? What percentage were repeat customers versus new customers?
Yes, it can get complicated very fast. But, if you want to make the very best decisions, the numbers you use are your best tools.
Create a Calendar
As online retailers, we all know about Black Friday and Cyber Monday. The holiday season is traditionally a busy time for most. But what about the rest of the year? And how do we stretch our marketing budget to cover it all?
We usually begin with creating a spreadsheet for each month of last year and the next. In last year’s column, we include the actual revenue total. For the new year, we add our revenue goal. Then, for each year, we add columns for actual marketing costs and the projected increase in budget to reach our sales goals.
Either within the same spreadsheet or otherwise, we begin assembling the various marketing events which we can leverage for marketing purposes. There is no “Master Marketing Calendar” that suits all eCommerce merchants. For instance, an auto parts retailers has little or no need to promote Back-to-School specials, just as a tennis shoe merchant probably won’t get much bounce by promoting a National Dairy Month sale.
When we assemble a marketing calendar, we begin by inserting all relevant events:
- Major holidays. Pretty easy, eh? Christmas, Valentine’s, Independence Day.
- Seasonal. Black Friday, Cyber Monday, Winter/Spring/Summer/Fall. Back-to-School.
- Cultural/Society. Black History Month. Breast Cancer Awareness Month.
- Vendor-driven. Regular promotions or sales by manufacturers/brands.
- Proprietary. Do you have regular promotions that are unique to your brand? What are your “blue-light” specials? You don’t have to compete with others for the same events!
The key is to identify marketing events or campaigns you can leverage each month to help you reach your sales goals.
Many merchants spend little time identifying various customer segments that can be more valuable to your sales growth. Using tools such as MailChimp Pro, we find that we can obtain a great deal of information about online purchasers that can be used to carefully tailor messages and campaigns.
How well are you segmenting your customers by:
- Buying history?
- Purchase frequency?
- Social activity?
- Engagement with your company?
If you do segment your customers, you’ll find that certain segments return a higher profitability and average order value (AOV) than others. If you want to truly be a marketing superstar, discover what constitutes your best customers and focus more of your efforts on them! Find out if they have any seasonal buying habits, as well.
Are your products seasonal? Do you have lines or brands that do better than others? It never hurts to focus on your bestsellers! Sure, we want to sell more of the slower-movers to deplete inventory, but your bestsellers are the ones that drive the most traffic and sales. Use these as anchors to drive other sales through the use of cross-sells, up-sells and related products.
Plan Your Campaigns
Now that you have your goals, your events and your targets, it’s time to begin putting together the various campaigns that will “deliver the goods.” As online merchants, you have a wide variety of tools to use:
- PPC ads
- Email subscribers
- Social media
- Transactional emails (order confirmation, welcome, reviews)
- Social sharing
- Traditional print, radio, television
As with your product and customer segments, you should analyze which medium has produced the best ROI for your online business. Note that some media may work better for some promotions. In planning media, keep in mind timing and account for preparation and approval time.
In upcoming articles, we’ll talk about implementation strategies for each medium and how to maximize your sales generation opportunities.