CFO’s guide to marketing budgeting and measurement33
- 4 April 19:45
Any business is created to generate profit. You invest money into your team, into developing and maintaining a product or service, and expect it all to pay off. And every single unit, every single action should work on making that happen.
Same goes for marketing, as it’s also a kind of investment. Learning your target audience and competition, attracting customers, nurturing your client base, gathering feedback about the product — all these things require time and money, and all of them need to bring you ROI after.
But how do you know which marketing activities bring you profit, and which are just another money leak? Marketing is not something tangible like equipment that you can evaluate, buy, and then sell if necessary. So, it needs a specific approach to become a projected and measurable source for your company’s growth.
Key Concepts & Definitions
Regardless of whether you hire a marketing agency or an in-house professional to cover your needs, you have to understand the basic marketing terms and concepts which will help you hold control over the results and know for what exactly you are paying.
Here are the main terms which every business owner should know. Some of them are quite common, while others are more specific and connected with the modern understanding of marketing:
- Target audience. This is a common term which means people who may potentially become customers to your business. But it’s important to define your audience and its segments not demographically (sex, age, etc.), or at least not only demographically, but based on the GPJ (Gains, Pains, Jobs) model. This means that you should think of who they are and what they need, thus why would they wish to buy your product.
- Advertising channel. This is any platform you can use as a means of communication with your target audiences, such as social networks (Facebook, Instagram, Twitter), blogs, search engines, as well as more traditional channels like TV or radio advertising.
- Message. A message is what you communicate to your audience. More precisely, it is what you mean and what they perceive. For example, “we care about your health”, or “we support sports” — you don’t necessarily need to speak these exact words, but your ads may deliver this as a core message.
- Marketing Funnel. It is all the ways you use and all the steps you take to convert your target audience into customers. Here’s what a typical funnel looks like:
- Lead. It’s a potential customer who had entered your marketing funnel and taken the first target action (for example, filled in a form) but hasn’t paid yet.
- Conversion rate. This is a percentage of people who moved to the next step of your marketing funnel out of the whole number of interactions. For example, if 1000 people had entered your landing page and 200 people applied, the conversion rate is 200 / 1000 = 20%.
Now when we have a common ground on the main marketing terms, we can move to more practical questions. In particular, how to evaluate risks, money and expected results.
Risk Management in Marketing
There’s a quite common situation when a potential marketing contractor comes to a company with a proposition which sounds like “Let’s invest a bunch of money into ads and then see what happens”. That would be, well, not the best solution ever, especially when you have absolutely no idea whether it will pay off or not.
If inheriting the investor’s point of view, you should never pay a penny without preliminary investigations. Of course, there are situations when you cannot be totally sure, especially in marketing, but at least you should understand risks, amounts of expenses, and approximately expected results.
Here’s a simple analogy: imagine you are the CFO of a pharmaceuticals company and the Operations Officer shows up with a proposition to install some sort of $2 mill worth machinery that can (in theory) produce more drugs. They say you absolutely need it because “your competitors also have it”, maybe it could “increase production by about 20% in about 4 months,” but they can’t be sure yet.
You wouldn’t accept the offer. You wouldn’t spend even two thousand if you didn’t know if an investment like that would pay off.
The same applies to marketing. You shouldn’t accept a marketing campaign offer with too many unknown variables or uncertain terms. But how do you know if the offer is good? Here’s what you should do to make an educated decision.
Do a feasibility study
Will the campaign be profitable within the estimated cost? Will you get a return on investment? Experienced marketing professionals always start with a feasibility study which is used to check the channel’s actual profitability.
To make things more convenient, you can transfer financial terminology onto marketing:
- Feasibility study = Marketing channel test
- Investment proposal = Marketing budget draft
- Letter of intent = Preliminary approval of the marketing budget
- Due diligence, Risk mitigation = Discussions between CFO & CMO
The thing is that it’s almost impossible to predict the results in advance unless your contractor has had exactly the same experience with your competitors (same business, same city, same target audience, etc.) This is not so often to occur, so a feasibility study will help you define the numbers without risking a big budget.
What is a reasonable price for a study? It totally depends on your industry and the cost per click (CPC). Ask your marketer to tell you an approximate CPC and how many ad clicks will be representative for a test, and this will define how much the test campaign will cost.
For example, if your estimated CPC is 5$ and you want 500 clicks, your study will cost about $2,500. But the costs may vary a lot, since sometimes your CPC may be much more expensive. For example, if you have a real estate agency in New York, a single click may cost you $25 or more.
Identify and evaluate risks
What can possibly go wrong with a marketing campaign or with testing a channel? The obvious thing is the financial side which should be clarified down to the details. There could also be legal, environmental, or operational issues but the most risk you take is with the channel itself. It might not give you the outcomes you have estimated (e.g., sufficient conversion).
If a contractor offers you an attractive, yet “sketchy” combination which lies on the margins of the rules. The more ‘what-ifs’ you ask your contractor, the easier it is to evaluate whether the campaign is worth it.
Differentiate between low- and high-risk marketing channels
Anything that might not pay-off is a risk. The channels you have already tested are in the safe zone. They are low-risk because you already know the traffic share on that channel and how much it costs to acquire a client. New channels are always high-risk.
It’s a good idea to combine both tried and new marketing channels in your strategy. Test high-risk channels before your competitors discover them, but only when you keep both feet on the ground with low-risk ones.
How much is enough?
Let’s get back to a more general question: how much is worth spending for marketing? The short answer is: as much as it is beneficial from the investment perspective.
However, many variables affect any marketing activity, and it is hard to predict the outcomes, especially when you are just launching your first promotion campaign.
And here we move to the next question, “How to evaluate the efforts?” which will help you hold control over the main activities and budgets.
Key Marketing Metrics
Every step of your marketing campaigns should be measured and analyzed. Moreso, you should do this systematically to watch changes in performance over time. So let’s talk about the key factors that define the campaign’s efficiency.
Here are the main metrics that every business owner should know and understand:
- CR (conversion rate, or % conv) — it’s the percentage of people that have completed a target action. If you look back at the marketing funnel, we had 100 people out of 1000 hitting the landing. In this case, the conversion rate is 10%.
- CPL (cost per lead) — it’s pretty straightforward, the more leads you get within the same campaign, the cheaper each of them is. So here, you divide the total amount spent on advertising by the number of leads attributed to a campaign. So, if you spend $1000 on Facebook advertising and get 50 leads, then your CPL will be $20.
- CAC (customer acquisition value) — the cost of acquiring new customers is calculated based on the total amount of marketing and advertising expenses within a certain period. Back to our Facebook Ad campaign, if you spend $1000 and it gives you 10 customers, then the value for each customer is $100.
- LTV (lifetime value) — this one defines the average total income you get from your clients within all the period of your cooperation. Here you take average monthly spendings on your product or service and multiply it by the average number of months that they are your client. The goal is to make LTV bigger than CAC.
These metrics will give you an understanding of whether your marketing activities are effective or not.
How to Evaluate Marketing Assets
So, you have assessed the risks, performed a feasibility study, all metrics are at hand, and you’re ready to roll with testing channels you deemed worthy of the risks. There’s one more step you need to take before you go on to the practical part, and it’s evaluating your marketing assets. Make the most out of what you already have.
Here are some examples of marketing assets:
- A website. Any landing pages, the corporate website and other sites you have built for your business. It could be a $500 or a $100,000 worth asset (considering prices for creation) that may continuously bring you clients.
- Subscribers. Communication through email and messengers (such as Telegram, Facebook Messenger, and WhatsApp) with the target audience, as well as application forms, may generate subscribers for you. The subscribers are much easier and cheaper to convert into customers than cold traffic.
- Content (graphic, video, audio, and text). The quality of content you post on the website or in social media directly affects how potential customers react to your messages (offers). And yes, the content may be reused in many different ways, so it’s always useful to keep a tab on it.
- Creative content. It’s anything that can attract attention to your brand and convert. For example, you may have banners for social media, or paid ads creatives, or any other type of advertising and promoting materials. All of them may be used or at least analyzed.
- Marketing funnels. Probably you have already tried some funnels which worked better or worse. Anyway, you’d better save all the documents with metrics and results. At least your new marketer can analyze what’s been wrong, or maybe they could use old ideas to bring you more customers.
- SEO (Search Engine Optimisation). Your positions in search engines are also an asset that should be used and multiplied. Although SEO is considered a mammoth of internet marketing, it’s still one of the strongest players on the scene.
Another essential to consider is the quality of your assets. Sometimes, it’s better to start something from scratch if it’s done bad or became outdated. Otherwise, it may spoil the effect of all the other marketing efforts. For example, if a website is too old, it may have an adverse effect on visitors’ trust, or if the content is poor quality, it may increase CAC dramatically.
The next question is what exactly you should do, how to choose marketing channels, and how to evaluate the results.
How to Analyze Marketing Channels
Prioritization of opportunities
There is a great number of marketing channels, and it’s not so easy to choose from. Search engines, social networks, mass media… Some channels are more popular, while others your competitors have yet to discover. How to prioritize the possible opportunities?
Marketers think this way:
- How many people will see your message?
- How many of them are your target audience?
- How much will it cost you?
Let’s practice calculating the metrics taking this initial data as an example:
- Cost for an advertising campaign: $500
- Total spendings on advertising in 1 year: $1000
- The number of leads acquired: 50
- The number of customers acquired: 100
The formula for CPL will be: 500 (cost per ad campaign) / 50 (leads acquired) = 10 (cost per lead).
The formula for CAC: 1000 (total spendings) / 100 (customers acquired) = 10 (customer acquisition cost).
The more leads and customers a channel acquires you, which makes the costs per lead/customer go down, the more effective it is for your business.
There is another metric you can calculate — cost per dollar in sales revenue, or return-on-sales ratio. The higher the ratio, the more money you keep in profit. It’s calculated based on your revenue and expenses. For example, if you have $394,000 in sales and $299,000 in expenses, your profit is $95,000.
In this case, the formula will look like this: ($95,000 / $394,000) * 100% = 24.11%
This means that you generate 24.11 cents per each dollar of sales.
Measuring the results
After you launch a promotion campaign, you still apply the investment approach. You ask yourself: how much have you spent and earned from each channel? If the balance is positive, then it is a valuable channel.
The main metrics here are ROI, CPL, and CAC. You need not only measure them separately for each channel, but also compare them with each other. If one channel is more profitable than another, maybe, you should redistribute your budget to gain more profits.
What you should not do is deeply consider the ‘soap metrics’, such as coverage, shares, likes, and comments. It’s something that can complete the whole picture, but it’s totally wrong when a marketer brings you these metrics as the main ones. You should only take account of those things which help you understand about money and profits.
What we are looking for is, again, higher ROI (return on investment), and lower CPL (cost per lead) and CAC (customer acquisition cost). What is important here is that CPL and CAC don’t always correlate.
More precisely, marketing is mainly about CPL, as its primary goal is to bring more leads to your marketing funnels. Converting them into customers is more about the sales process. So it’s better to analyze these metrics separately. But CAC is also important to evaluate the quality of leads. If they don’t become customers, they are low-quality.
When should you make the evaluations?
The first time should be after the test launch when you consider whether this particular channel is worth using. For different channels, there will be different periods:
- Banner ads — a week is enough to give results and another week will show the actual ROI of this channel;
- CPC ads — in 2 weeks you will see the first significant results and after another 2 weeks you can evaluate the actual ROI;
- SEO requires a lot more time, about 3-4 months to see the first results and another 4-8 to evaluate the actual ROI.
If a channel works well, keep investing, and also keep evaluating systematically. Some channels may run out for your business or lose global popularity. Remember MySpace? It was huge, but just till Facebook appeared.
How to Hire Marketing Professionals
Now, we’re onto the fun part. How do you know if you’re hiring good marketing people? Even the test launch will cost you money, and you obviously don’t want to just give it away.
The best practice is, of course, testing. If your budget affords it, it’s always better to test multiple agencies simultaneously and compare the results. You will see which contractor outperforms the rest and that can be a deciding factor. However, there’s no sense to practice this with SEO. It takes the longest to show results, and moreover, two specialists working at a time might mess up your promotion.
Except for testing, there are certain criteria which will help you define whether you can trust a contractor on not.
The first meeting
Red flag: “Here’s our [standard] business proposal, we’ll start working after the first paycheck.”
Most likely these guys are just interested in your money, as without getting to know your target audience, defining your marketing assets or even learning what you do, they can’t actually make a valid proposal. And, quite frankly, they probably won’t.
Good practice: “We need to know more facts about your business so that we could analyze it and make a proposal.”
If a candidate asks you questions about your business and makes an effort to understand how you work, it’s a job well done. Another good indicator is when they point out your flaws (e.g., a link that’s not working or if your sales team doesn’t have scripts for working with leads), thus bring you the value in advance.
Red flag: You get a generic proposal with standard approaches and pricing schemes. It looks like a template they send to everyone.
Good practice: A custom-made business proposal that takes into account the unique features of your business and offers solutions.
You can see if a person is motivated to work by how they are engrossed in the project. Unmotivated contractors are more interested in their paycheck, rather than your success.
Red flag: There is no competition analysis unless you pay in advance. Once again, they are not interested in your success.
Good practice: “We’ve studied your competitors’ strengths and weaknesses, and here we have a few ideas on how to outrun them.”
Say, none of the companies in your segment offer a money-back guarantee, or most of them have weak content. If your marketers investigate such things and offer personalized tactics, it means they are trying to bring you more than standard procedures which may be used by all of your competitors.
Red flag: They don’t want to complete any tests unless you pay in advance, or they send you a short generic document just to get off their backs.
Good practice: They do even more than was asked in the document and provide you with practical advice or another value.
A good agency will go the extra mile to win the client’s loyalty and show how they can bring you profits.
Setting up marketing campaigns
Red flag: The campaigns are set up on the agency’s accounts. You might lose all the configurations in case you decide to break the contract.
Good practice: The campaigns are set up on your accounts. For example, Facebook has an Ads Manager, they should be using it with your access credentials, and the same goes for Google and other ads.
So, as you see, among many aspects the financial side of choosing a marketing specialist is not the main one. But yes, budgeting is important, so let’s speak about the money.
The cheaper, the better?
At first sight, it seems clear: why should you pay more if there is a candidate who agrees to do the same job for less money? But that’s only at first sight. Quite often, a $1,500 contractor may cost a company more than the one who bills $5,000.
How is that possible?
It’s quite easy if you know the process. The total cost usually consists of two parts: the advertising budget and the marketer’s earnings.
1) Advertising budget. A smaller budget does not necessarily mean cheaper leads. It may also be:
- fewer channels, which means fewer possibilities to find the optimal opportunities; or
- less money for testing each separate channel, which will lead to inaccurate results and false forecasts.
All in all, if you have a limited budget for testing marketing channels, you can discuss the strategy with a marketer and find a compromise.
2) Marketer’s earnings. Yes, an experienced marketer charges more than a newbie. But it’s also quite logical: a good marketer will do their job better finding the best tactics and decreasing your CAC over time by professionally tuning the campaigns. While a cheaper specialist will probably practice and learn at your expense. It’s also an option, but in this case, you shouldn’t expect really high results.
So let’s get back to our example. With a cheaper marketer, you may get fewer leads for a higher cost which will make a huge difference in the long run. It’s not the rule, but very often it works like this.
In-House Marketers vs. Contractors
Some companies stand for in-house teams, others prefer to outsource whenever possible, and both sides have their reasons. We will not go deep into all the pros and cons, but give you the main reference points.
The first thing that matters is the type of your company and the type of a website for marketing.
- Brand websites: for communicating a company’s values, ideas, showing news and updates.
- Conversion websites: for giving information about a company but also for involving a target action, like becoming a club member or starting a partnership.
- Brand websites: purely for sharing purposes, news and status update about star professionals, coaches or trainers.
- Conversion websites: used by experts, coaches, trainers, mentors for teaching purposes and selling their educational programs or services.
- Brand websites: sometimes marketplaces create brand sites to attract partners and investors.
- Conversion websites: a platform itself whose main goal is to maximize sales.
Brand platforms (banks, TV, car salons)
- Brand websites: info about the company, content, projects and other things, depending on a project.
- Conversion websites: sometimes they are used as additional tools to attract attention to a specific event or service (e.g., exhibition, charity meeting, or TV show).
Conversion websites need an in-house copywriter to write about your company and preferably a marketer to manage the project. If you decide to hire an in-house marketer, it doesn’t have to be a star specialist but it has to be an employee motivated to work with your business. Other tasks can be delegated to an agency.
Brand websites usually don’t need in-house marketers or SEO specialists. A good digital agency can set up internal links and SEO (within 6-8 months), but what you do need is an in-house copywriter to work on your blog. But when it goes about creative sites like brand platforms, it’s better to work in-house.
Agency vs. Team
An in-house team is a better option from various perspectives. They’re more loyal to your product. They’re basically living it and that’s why they are far more likely to work harder when seeing results of their efforts. An in-house team also reacts to changes inside the company quicker than an agency.
On the other hand, a good agency is better at doing certain tasks since they have qualified specialists with more expertise. Sometimes, it’s not reasonable to hire specialists for every single function, and from this standpoint, agencies may perform better.
It is important to apply the investment approach to any business activity, including marketing. All in all, you invest time, money and other resources. Whether you are hiring a contractor or create an in-house marketing team, it’s important to measure ROI against your expenses all the time and scale the results.
For this, keep track of the key metrics such as ROI, CAC, and CPL and consider them starting from the very first meeting with your future marketers. Make sure that they think about your profits and don’t rely on ‘fake metrics’, such as likes and shares.
When hiring a marketing contractor or/and an in-house team member, assess how they can contribute to your business. A cheaper specialist won’t necessarily bring you profit, and they may increase your risks. Whatever decision you make, you always need to remember that ROI is the king.
Previously, we wrote that “If consumers do not see anything unique in your brand, you have consumer goods” span>
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