Is Your Marketing Really Worth It? - A few KPIs to measure returns on eCommerce marketing
In the current economy - with COVID still impacting business and uncertainty looming - good marketing can be the difference between a healthy business and going out of business. Realistically, this is true in any economy, even when things are going smoothly.
As an eCommerce business, you need solid marketing to bring in customers, but how do you know if your marketing is really pulling its weight? How can you tell if the investment is worthwhile or if you’d be better off spending your money somewhere else?
The Big Picture (How much should you be spending?)
The big question you may be asking is “How much should I budget for marketing?” The answer is “It depends.”
Anecdotally, marketing budgets tend to run between 7-12 percent of total revenue, however, there are just too many factors to base your marketing budget strictly on a percentage of revenue. The SBA recommends a revenue-based marketing budget like this only if your net is 10-12 percent or higher. For many in the eCommerce world, net margins are running below this level and marketing budgets need to be a bit more flexible (NYU’s Stern School of Business estimates average net for online retail at closer to 5%).
There are a couple more things to consider in terms of how much to spend on marketing, such as the type of business and where you are in the business life cycle. Another factor is who you’re marketing to. Let’s take a look at those variables, then discuss a few key metrics for measuring how effectively you’re using that marketing budget.
Growth stage
Early on, a business needs to acquire new customers quickly. It can be very hard to get organic traffic or rely on word of mouth because you just don’t have that much reach yet. To overcome those limitations, you’ll often need to invest a higher percentage of your budget into marketing early on. Think of it like that initial thrust needed to escape Earth’s gravitational pull.
As your business matures, you’ll have more reach and more name recognition (as well as more repeat customers as long as loyalty and customer satisfaction are high) which typically allows you to get by with a smaller marketing budget. Of course, if you choose to move into a market, introduce a new product, or shift in some other way, you may need a bump to help you gain traction in that new space.
B2C vs B2B
Of course, marketing is all about the market - the people you’re trying to convince to buy your product or service. Who those people are will have a big impact on your marketing efforts and how much you need to budget to reach your goals.
B2B marketing often has longer sales cycles and requires more relationship building, but you’re typically looking for a smaller number of clients and expecting longer relationships and high lifetime value. Your marketing investment for B2B will likely be focused on trade shows and industry publications, along with whitepapers and other collateral to support a sales team.
B2C marketing, on the other hand, requires you to overcome all the noise out there in the consumer marketplace just to get heard. Then you’re facing a higher churn of new customers who you constantly have to replace. For B2C eCom companies, marketing is all about the list. Your budget will be heavily focused on bringing in new customers through social media and ads, as well as executing and tracking effective email marketing campaigns.
It’s always cheaper to keep current customers than it is to gain new ones, so B2C marketing also spends plenty of time and money nurturing existing customers, tracking existing purchases, and encouraging upsells complementary purchases.
Because of these extra challenges, B2C marketing budgets are often a couple of points higher than B2B as a percentage of revenue. Many of the B2C companies we see are underspending on marketing compared to those companies that are most successful. If you fall into that category, you could be leaving money on the table.
Here are some key performance indicators to watch if you want to track the effectiveness of your eCommerce marketing campaigns and maximize your profits (and who doesn’t want to do that?).
Customer Acquisition Cost
How much are you spending to bring in new customers? Every business needs to bring in new customers in order to grow or simply replace those who inevitably stop buying. Your Customer Acquisition Cost is essentially measured by dividing your marketing cost by the number of new customers acquired in that timeframe. Dial this in by channel to find your most cost-effective source of new customers.
Customer Lifetime Value
How much is a customer worth to your business over time? It’s not enough to know how much a new customer costs. You also have to know how much that customer is likely to spend with your company over their lifetime. This gives you a clear picture of how much you really can spend to acquire new customers. To get CLV, you’ll multiple your annual revenue per customer by the average buying lifespan of your customer in years.
Customer Retention
Customer retention is something of a holy grail in business. The longer you can keep a customer, the less you’ll need to spend to bring in new ones (or the more you’ll grow with new customers instead of just staying even). And the more loyal your customers are, the less energy and money it takes to generate sales from them.
Your customer retention rate is the number of existing customers for the period (total customers at the end of the period minus newly acquired customers) divided by the number of customers at the beginning of the period.
Conclusion
When you know how much each new customer costs to acquire, how long they’ll buy from you, and how much they’ll buy over a lifetime, you’ll be able to make profitable decisions about your marketing budget.
Once you’ve set a budget for your marketing, analyze the marketing itself to make sure you’re using your budget in the best way possible. Marketing is all about ROI. If certain campaigns or channels aren’t giving you enough profitable sales to put you in the black, it’s time to refocus your marketing spending elsewhere.
