CFOs are not known for encouraging you to spend more. Not, at least, without good reason.
The key to making your CFO happy with expanding your digital marketing budget is to give them a very good reason. Honestly, you should give yourself a very good reason to expand your marketing budget.
Now, the obvious reason is growth. Marketing drives growth; that’s not a new idea. But not all marketing drives growth – only good marketing.
So how can you 1) know that your digital marketing is paying off and 2) prove that it’s paying off to your CFO, your investors or your board?
I’m so glad you asked.
First: Calculate the Value You Can Create
How much net profit does every lead or sale generate for your company? It sounds like an easy question, but it can be surprisingly hard to answer.
If your company’s structure allows your marketing to drive sales directly, this can be pretty easy. Maybe you sell widgets online for $20: Your cost to produce and deliver a widget is $5, and the profit you can drive from a sale is $15.
Your formula is:
(Sale Price) – (Cost of Goods) = (Sale Value)
Things are a little less easy when you start to consider the long-term value of a customer, or a sales cycle that can stretch into days, weeks, months or years from that initial lead.
Still, it’s important that you understand what that profit is, and the role your marketing can play.
Your formula for finding your value in a more complex sales environment could look something like this:
{(Average Sale) – (Cost of Goods or Services)} x (Conversion Rate) = (Lead Value)
Depending on how your business runs and the potential for repeat business, you might want to replace (Average Sale) with (Average Long-Term Customer Value), or possibly (Average First-Year Customer Value).
It can be tempting to gloss over this part of the process, to guesstimate or to base your advertising on hunches and intuition about the value you’re driving.
Don’t.
Someday your CFO, a board member or an investor will ask you to justify the costs of your marketing efforts. In all those situations, you need to have a good answer. Better yet, don’t wait until they ask; be proactive about presenting them.
[To read more of Mike Schaffer’s thought leadership click here]
Second: Attribute Sales
Now that you know the value of a lead or sale, it’s important to know where every sale you drive comes from.
How much net profit does every lead or sale generate for your company? It sounds like an easy question, but it can be surprisingly hard to answer.
“Attribution” is digital advertising speak for “What brought the customer here?” If a customer clicked on a Google pay-per-click ad that brought them to your site, and then bought something, that sale would probably be attributed to your Google pay-per-click ads.
I say “probably” because it can get more complicated. What happens if a customer clicked a Facebook ad two days ago, browsed your site and left without making a purchase, but then clicked on a Google ad today and made a $100 purchase? How much of that sale do you attribute to Google? How much to Facebook?
The answer will depend on what’s called your “attribution model.” There are literally hundreds to choose from, but it’s basically how much “credit” you give to each piece of advertising that a customer encounters on their way toward a sale.
Tools like Google Analytics can let you choose from a list of standard attribution models. Once you reach a decent scale, it’s probably worth implementing more complex software that’s tied directly to your ad platforms and that does this on your behalf.
Third: Calculate Your ROAS
Now you’ve figured out:
- How much a sale or lead is worth.
- Your spend on each platform.
- The sales or leads that each platform generates.
That lets you put it all together and get a really clear picture of the value you’re delivering with your ROAS. ROAS stands for “return on advertising spend.” It might sound complex, but it’s not really. Plus, CFOs go nuts for acronyms.
Your goal is to tie the sales or leads driven by every type of advertising you do with the amount of money you spent on that type of advertising.
Your formula here is:
(Per-Platform Revenue) / (Per-Platform Cost) = (Per-Platform ROAS)
So, if you spent $50,000 on Facebook advertising, and drove $50,000 in profits, you have a ROAS of 100% for Facebook.
If you spent $50,000 on Google and drove $100,000 in profits, you have a ROAS of 200% for Google. Obviously, above 100% and you’re making money; below 100% and you’re losing it.
It’s important to note whether you’re calculating your ROAS on profit or revenue. Calculating ROAS on revenue is much more common, but then you’ve got an additional step of adding in your profit margins later on. I tend to prefer calculating ROAS on profit from the get-go; this enables you to have that data available and front-of-mind for every decision you make related to your digital ad spend.
Either way, understanding your per-platform ROAS lets you optimize for the most effective platform, or combination of platforms.
Once you’ve got that figured out, you can use essentially the same formula to calculate your overall digital advertising ROAS.
(Digital Ad Revenue) / (Digital Ad Cost) = (Overall ROAS)
Now, you’re ready to impress your CFO.
Fourth: Make Your CFO Love You
With these numbers in hand, you can pretty easily understand whether your advertising’s working. If you have an ROAS of under 100%, you’re losing money. Over, and you’re driving profit for your company.
While ROAS is a common term in advertising, return on investment (ROI) might be even simpler for your CFO to understand. How many dollars in profit are you generating for every dollar spent on digital marketing? An ROAS of 100% is the same as a 1:1 profit:spend ratio. An ROAS of 400% is the same as a 4:1 profit:spend ratio.
Then, you can go to your CFO and say things like, “For every $1 you give me in ad spend, I can create $4 in profit.”
You may sound a bit like Bernie Madoff, but the difference is that you can actually deliver on your promises.
So, what are you waiting for? Get out there, crunch some numbers, and get ready to make your CFO your digital marketing budget’s best ally.
[For more on Echo Factory’s approach to Digital Agency click here]
