Setting Your Online Marketing Budget

Undoubtedly, many of you are putting the finishing touches on your online marketing, e-mail marketing, or catalog marketing budget for 2007. Oh, the excitement!

Is there anything more enjoyable than sitting across from your Chief Financial Officer, having to defend why it is important to advertise with a certain affiliate at a time when expenses need to be trimmed by ten percent?

CFO's demand rapid, financially-based answers to questions. The humble Chief Marketing Officer or Online Marketing Executive needs to be able to respond in a credible, but timely manner.

Most of the time, when asked a random question, you don't have the appropriate data with you to answer the question quickly. This is where the "square root" function comes into play.

Frequently, sales generated by advertising follow a "square root" function. In other words, if you had the opportunity to increase your marketing budget by twenty percent, your net sales would increase by the square root of 1.2. This number is (1.2 ^ 0.5) = 1.095. In other words, a twenty percent increase in marketing spend yields a 9.5% increase in net sales.

This becomes important when the CFO makes a random statement like,"Please reduce your marketing budget by ten percent, you have no choice in this, everybody must share in the pain."

Look at this example, where the online marketing budget is reduced by ten percent:

High-Level Online Marketing Scenario
		Reduce Ex-	Incremental
	Base Case	pense by 10%	Sales Lost
Orders	90,909	86,244	4,665
Average Order Size	$110.00	$110.00	$110.00
Cost per Order (CPA)	$22.00	$20.87	$42.87
Net Sales	$10,000,000	$9,486,833	$513,167
Gross Margin @ 40%	$4,000,000	$3,794,733	$205,267
Marketing Cost	$2,000,000	$1,800,000	$200,000
Pick/Pack/Ship Expense @ 13%	$1,300,000	$1,233,288	$66,712
Variable Operating Profit	$700,000	$761,445	($61,445)
Profit as a % of Net Sales	7.0%	8.0%	-12.0%
Ad to Sales Ratio	20.0%	19.0%	39.0%

Notice how the profit and loss statement changes. In this case, the CFO may have a good suggestion, as the incremental advertising dollars are not yielding a sufficient return on investment. Conversely, the numbers might work out in your favor, giving you the ammunition to actually ask the CFO for more money!

Not every business follows the "square root" rule. Your analyst can help you figure out which relationship makes the most sense to build the scenarios around. But in a pinch, go with the square root function. And then ask your CFO to quickly cost-justify some of her investments!!

There Goes Google Again

Sometimes things just slip by me, and I need a fellow blogger to awaken my senses.

Earlier this year, Google released Google Checkout, a method to make checkout easy for customers shopping your site. Google charges a fee of 2% of the order size, plus a $0.20 flat fee per transaction. In other words, Google picks up the charges associated with the credit card order, and keeps a small fee for themselves.

The list of participants is a who's who of online merchandising.

So, my dear online marketers, database marketers, and multichannel marketers. I have a few questions for you.

Question #1: Did you receive incessant and passionate feedback from your customers, begging you to add this service to the array of checkout options you already offer?

Question #2: At what point do you, as an online marketing executive, finally stand up to Google and say "No thanks, I'll manage the rest of my business on my own?

Think about it. A portion of your customers fail to recognize your brand, and instead type BLUE NILE into Google, resulting in a click-through to your website. Worse, the click-through may be the result of the customer clicking on paid search. In this case, you pay Google because you haven't trained your own beloved customer to bookmark your URL.

So, you pay Google to get your own customer to visit your site. Next, you pay Google to facilitate the transaction on your site. You use Google Analytics to analyze how effectively Google managed your purchase consideration process. You enter key metrics into the documents and spreadsheet application Google hosts. Then, you blog about the process with Blogger, so that your customers can read the content, search for your URL on Google, and start the process all over again.

Will you let Google manage your distribution center one day? Will you let Google staff your contact center for you? Will you let Google run your finance department, or human resource department?

Maybe I'm just paranoid. You tell me. It's your turn to participate in the discussion.