Bring Better Business Decisions and Increase Profit, Return on Marketing Investment and Cash Flow

These are the steps to avoid burning money and maximize profit:

• To be successful with digital marketing, we must measure and analyze. Period.
• We must know which are the most important indicators.
• We must understand the right way to calculate mission-critical KPIs.
• We must calculate those for our whole business, then break down calculations to platform, project, and campaign levels.
• Using the results, we can now decide what activities must be stopped or paused, which to improve, and which to scale up like crazy.

You have to invest always in marketing activities, where your return is the highest and where the lifetime value of a customer is much bigger than the cost of acquiring a new customer.

Digital marketers often forget about the ultimate goals of businesses and get obsessed with vanity goals. Advertising with the objective of getting cheap video views? Great! But what about purchases? Do these people ever care to do anything useful for you other than watching your video? Almost never.

“So this is the goal: To make money by increasing net profit, while simultaneously

  increasing return on investment, and simultaneously increasing cash flow.”

Eliyahu M. Goldratt

Your accountant calculates profit for your company once a month. But do you know the source of profit (or loss)? Which channels are doing great, and which are poorly? Which campaigns and products make money for you, and which ones burn money?

Often, even these don’t give enough insights. For example, a product introduction project may involve several campaigns, such as testing, lead generation, and a long series of emails sent on autopilot. You can’t expect every campaign to be profitable, but you must at least break even with their combination.

Instead of a product, we often talk about a product family, for example, similarly priced ladies’ sandals in a footwear webshop. For marketers of intangible assets, a product family often consists of products or services building on top of each other, from a tiny offer to premium services, with vastly different price tags.

Knowing the profit of campaigns and channels (such as advertising channels) is very important, but that doesn’t give the full picture. You must also know the Return on Marketing Investment (ROMI). Where should you invest more and concentrate on your offers? ROMI by channels, campaigns, and projects gives the answer.

Most digital marketers either don’t calculate ROMI at all or make several mistakes, which may lead to bad business decisions.

Typical mistakes when calculating profit and ROMI:

• Not correctly attributing sales to channels and platforms, no corrections for under- or overreporting.
• Not making corrections when webshop sales don’t match the total reported by the various platforms.
• Not accounting for returns and refunds.
• Mixing gross and net (of V.A.T., sales tax) financial values.
• Not accounting for the costs of internal and contracted work related to customer acquisition.
• Superficial calculation of product and service delivery costs (including COGS).
• Using the wrong formula for ROMI (and ROI) calculation.
• Overestimating the cost of lead generation (not accounting for sales generated in the same campaign).

Other misconceptions and mistakes:

• Thinking that a good ROAS always translates into good ROMI and profit – nothing is further from the truth.
• Not consolidating campaigns, and therefore misjudging the effectiveness of channels (for example, considering cost per lead expensive, although premium sales would pour due to a follow-up email campaign).
• Relying on vanity metrics (as mentioned before).

Suppose, finally, we have enough information about profit, ROAS, ROMI by channels/platforms, projects/campaigns, and product families. Therefore we know where our marketing investments bring good or bad returns.

How shall we use this information to make better business decisions and increase profit and ROMI?

• Obviously, loss leader channels and campaigns with no hope of gaining profitability with a follow-up campaign must be abandoned or paused.
• There might be other channels that underperform, but there are signs and potential for making those profitable. Here we exert further efforts to improve performance.
• The best channels, campaigns, and products bring substantial profit and good ROMI. If our niche, the size of the audience, is big enough, it is time to scale up, in most cases, to spend more money on ads.

Needless to say, even well-performing campaigns have to be improved. For example, a new creative which performs 10% better than the previous ones may contribute tremendously to our profit margin.

The best is if we can bootstrap our campaigns. That is, we buy more impressions this week using the revenue generated the week before (and do that as long as possible).

Once again, we need to avoid micro-management and see the complete picture. For example, blogging can be tedious but might bring quality leads that convert well later. BTW we have developed a simulator to demonstrate scaling up and predict the results in finite markets where the phenomenon of diminishing results is likely to hit.

You may want to develop your own system if you have the time and are confident in your digital marketing measurement skills.

Otherwise, see our solutions (you can still decide to adapt those to your unique needs):