In December, our net profit was negative $259,000 (we lost almost $300,000). The next month, our net profit was positive $181,000 (we made almost $200,000).
What was the difference?
We set marketing budgets.
The False Ideal of Direct Marketing
In direct marketing, we expect a direct return on our marketing investments. If we spend $1,000, we expect to make at least $1,000 back; if we don’t, we stop spending money. If we spend $1,000 and make $2,000, we increase spend to infinity until the numbers no longer work.
It’s a simple, logical promise. But, it doesn’t work.
Today, especially online, it’s next to impossible to nail down exactly where we get customers. Someone might hear about your business from a friend visit your website on her phone for five seconds, get distracted, then get retargeted display ad, then visit your website again on her laptop, and then eventually go back to her tablet that night laying in bed to buy your product.
How the heck do you track how much you spent to acquire that customer?
We can’t and that’s OK.
“Branding”, aka Running Ads Without Accountability
I used to mock big businesses and their wasteful ad spend. They’d run dumb billboards, magazine ads, and TV commercial with no clear call to action for prospects to buy. Most call this “branding” – I call it wasteful marketing likely by “award-winning” agencies.
However, big companies do have something right…They wouldn’t be massive companies today if they hadn’t figured out how to set marketing budgets.
Coming from a direct marketing background, I could never understand the purpose of a marketing budget. Every time we talked to a new agency or hired a new marketing employee, they’d ask, “What’s the marketing budget?” I’d say, “There is no budget. As long as we’re making money, keep spending.”
Now I see how wrong I was.
The Middle Path
The principles of direct marketing work. It’s how we grew a $17,000 per month e-commerce business to over $2.6 million per month in less than three years with zero funding from ourselves or investors. Our ads had to produce profitable sales.
At some point, there are too many ways customers can find your business and eventually decide to buy. It becomes next to impossible to determine the exact, accurate attribution of sales to each ad channel.
The only solution is to set an overall marketing budget based on total expected sales and marketing budgets for the major individual channels. This is what we did to produce a positive $440,000 swing in profits in one month. Nothing else changed.
The best way to manage marketing is to think like a direct marketer and manage marketing like a big business.
We must measure our marketing. We must try to hold every dollar we spend on a channel accountable to producing sales. If we can’t prove a channel is making us money, that money should be diverted elsewhere.
However, we must also realize that perfect attribution is impossible today. Therefore, to make sure we produce the profits we want, we have to set budgets for our marketing spend.
As it seems so often in life, the middle path between two extremes is likely the best path.