By optimizing marketing spend, savvy marketers ensure that every dollar invested in marketing efforts yields the maximum return. This requires great planning and a deep understanding of various marketing channels. Also, knowing your customer base and the interplay of campaign elements is essential for the success of your campaign.
This guide will explore successful marketing spend optimization (MSO), covering the total budget allocation to marketing mix modeling (MMM).
What is Marketing Spend Optimization?
Marketing Spend Optimization is the process of enhancing the impact of each marketing dollar spent to deliver a higher ROI. By leveraging Analytics and Machine Learning, marketers can determine the optimal mix of marketing channels and the appropriate level of investment in each channel.
In addition to maximizing overall marketing effectiveness, MSO reduces extra costs, thus driving a higher ROI.
MSO isn't just about chasing the next promising trend. MSO is rooted in business objectives and constantly evaluates the market to ensure your marketing budget achieves the best results.
The Balancing Act of Budget Sizing
Marketing budget optimization is the very first step of the MSO.
Traditionally, companies allocate a fixed percentage of the (expected) revenue. For instance, B2B companies allocate 2 to 5% of their revenue as a marketing budget. This approach, however, could be inflexible, and today's business must account for expected growth, seasonality, and ROI goals.
To size your budget effectively, consider:
- The target revenue and target market
- Current revenue and growth projections
- New product launch or expansion to new territories
- Historical conversion rates and customer acquisition costs
- The competitive marketplace
- Testing new marketing channels and techniques
Allocating Your Budget for Impact
After setting your budget, the next step is to strategically distribute it among various marketing channels, products, and territories. The goal is to maximize exposure and, ultimately, turn prospects into loyal customers.
Online and Offline Channels
Digital channels have become the primary way of communication, besides traditional methods like print, out-of-home, and television. Today, nearly 54% of the budget is the digital marketing budget. Here are some important digital channels:
- Search engine optimization (SEO)
- Pay-per-click (PPC) advertising
- Social media marketing
- Email marketing
- Content marketing
Choose A Right Channel Mix
Different marketing channels have different roles in the customer journey. For example, some channels focus on creating brand awareness at the beginning. Other channels are more focused on encouraging conversions at the end.
Each channel serves a specific purpose in guiding customers through the buying process. Great marketing teams select a mix of channels to deliver great short-term and long-term performance.
Top-of-Funnel Channels
These channels attract a large audience but typically do not have a close connection to immediate sales because they reach a broad range of people. Think of content marketing, SEO, and TV. These channels are crucial for raising brand awareness and generating interest in your products or services.
Middle-of-Funnel Channels
These channels nurture leads who have shown initial interest, but aren't quite ready to make a purchase. Email marketing (Newsletter), retargeting ads, and webinars fall into this category. They help move prospects along the customer journey by providing more information and building trust
Lower Funnel Channels
These channels have a more direct connection to sales and customer acquisition. Paid search, email marketing, and promotions fall under this category.
Determining The Right KPIs
The key to effective allocation is understanding what success looks like. This means setting Key Performance Indicators (KPIs) that closely align with your business goals. For example, a key performance indicator (KPI) for brand awareness could be website visits or social shares. On the other hand, a KPI for sales would focus on conversion rates and average order value.
However, it's crucial to remember the adage:
"When a measure becomes a target, it ceases to be a good measure"
Fixating on specific KPIs can skew strategies and lead to unintended consequences. If the main goal is to increase conversion rates, there is a risk of focusing too much on short-term benefits. This could come at the cost of long-term brand health and customer satisfaction.
Therefore, while KPIs are indispensable for gauging success, they should not overshadow the holistic goals of your marketing strategy.
Crafting The Optimum Marketing Mix
The right mix will depend on your target audience and your product or service. Focus on choosing the channels that will best engage your audience rather than trying to be everywhere at once.
Measuring Your Returns: ROI and ROAS
The ultimate goal of marketing is to impact the bottom line, and that's where return of investment (ROI) and its close cousin, ROAS, come into play. They clearly show how effectively your marketing spend has translated into revenue.
Non-Experimental ROI
This refers to empirical or observational measurements for the before-and-after effect of a marketing campaign.
It's simple, but usually, it overestimates the true ROI
Hence, it's important to properly caveat this information. If possible, consider employing Causal Inference methods like Causal Impact.
Experimental ROI
People often use this model in A/B testing to obtain a more precise measurement. It focuses on the impact of the marketing campaign. This is the gold standard, however, it can also suffer from a few drawbacks:
- Conducting A/B testing may not always be feasible or practical (or even ethical).
- It carries significant risks and costs.
- Factors like seasonal variations or marketplace conditions can introduce biases into the outcomes.
Measuring ROAS
Return on Ad Spend ROAS takes the ad spend and divides it by revenue generated from that specific ad campaign. It's relatively easier than calculating ROI, but instead of considering all expenses, it only looks at advertising costs.
How to Track ROAS
You need proper tracking mechanisms to track ROAS for a specific campaign. Different types of campaigns and advertising platforms can easily track performance using unique URLs, tracking pixels, or other methods.
When formulating the measurement strategy, it's crucial to consider the potential privacy challenges. We previously wrote about this topic here.
Marketing Mix Modeling (MMM)
Marketing Mix Modeling (MMM) is a statistical analysis method. Companies use it to determine how different marketing strategies affect sales and predict the impact of future tactics. It involves analyzing historical data to understand how various marketing mix components contribute to sales.
A/B testing examines the impact of changes in a controlled environment. MMM analyzes all marketing activities, including external factors such as the economy, competition, and time of year. MMMs are privacy-proof by default and can offer an attractive alternative in the privacy-first era.
MMM helps in allocating marketing resources efficiently by identifying the most and least effective marketing tactics in past campaigns.
It is good at considering both long-term brand growth and short-term sales increases. This gives a better understanding of how well marketing works.
However, implementing MMM requires sophisticated statistical skills and access to detailed and accurate historical data, which can be challenging for some organizations.
We have extensively written on the MMM topics, which we invite you to check out here or here.
The Final Word
Understanding and managing your marketing spend is crucial for the success and business growth. You can create a successful marketing plan by following the tips in this post. This plan will help your brand make more money and succeed in the long term.
Marketing spend is less of a cost and more of an investment—one that, when optimized, can yield exceptional results.
"Half the money I spend on advertising is wasted; the trouble is I don’t know which half"
— John Wanamaker
Using the correct optimization techniques, you can determine which half is performing well, helping you achieve clear and measurable results.
