Misleading reports are costing you & your business money.
Those reports might be misleading on purpose (sad, but it happens), or more likely it’s just lazy reporting. Either way a focus on ‘average’ metrics is probably causing you to spend too much & profit too little.
For example, your average conversion rate, your average cost per lead, your average ROAS.
These are quick & easy to communicate (especially to a board member who doesn’t share your level of marketing expertise), but that increased convenience might be hiding (or eliminating) the value of the data & the insights you can pull from them.
Why should you care? Because if you’re making decisions based on those average metrics (in reports or tools like Google’s Performance Planner) you might be spending too much on your marketing.
Let’s walk through a couple of examples, give you the tools to think differently & a way to know – for sure – if you’re spending too much on your digital marketing.
Example 1 – the simple (misleading) average
Let’s start super simple.
You’re running 5 different campaigns. The average cost per lead (CPL) is $5.
Great you say, let’s double the budget… but if the only campaign that has capacity to scale is already costing $20 a lead (& it’s the other campaigns that are keeping your average low), then things will get expensive fast!
If you’re currently running different types of campaigns – even just within a single platform like Google Ads – then please ensure the reports you ask for show the cost & outcomes for each type. It’s impossible to find useful insights if those are all lumped together.
To quote Avinash Kaushik, Google’s own Digital Evangelist, “all data in aggregate is crap!” What he didn’t go on to say is that using aggregate data is probably costing you a significant portion of your marketing budget. Let’s fix that.
Example 2 – let’s spend more, the average doesn’t change much!
For this example I’ll use approximate numbers from a strategy call I did just this morning.
The business was spending ~$50k to get 10,000 leads (per month) from a single non-brand search campaign. For the purposes of this example we’ll ignore the other campaign types & assume that tracking is accurate.
So their CPL is $5.
Google’s Performance Planner suggested the campaign could easily spend $100k next month, which would deliver about 17,000 leads in total.
Great they said… the average CPL only goes up 17% (from $5 to $5.88), let’s do it.
You can see where this is going….
The new average CPL looks ok, but if we treat that $100k as two $50k ‘chunks’ of spend… then:
the CPL of that new ‘chunk’ is really $50k/7000 leads = $7.14 /lead
An increase of 42.9% not the 17.6% they first thought.
One of my pet peeves is that Google never shows the incremental difference, just the new average. And of course the data is presented on a nice cumulative curve… which always goes up & to the right, giving you the visual cue that if you spend more you’ll make more.
And you will. You will get more leads if you invest more.
But think critically and focus on incremental costs vs incremental gains to find out what the extra cost is doing for your gross profit.
Often we see accounts where spending less would greatly benefit the business.
This is why knowing your breakeven is so vital
It might be that 17,000 leads at $7.14 is a great deal for the business – but to understand that, we have to know the breakeven point, so we can figure out the extra profit gained from investing that second $50k chunk.
If BE = $6.50, then with a net CPL of $5.88 you’re thinking, “awesome I’m still profitable”
And you are. But total profit just went down.
Quick maths interlude… you go from a gross profit of $1.50 per lead x 10000 leads = $15k
Down to $0.62 per lead x 17000 leads = $10.5k
So yes, still profitable.. But that additional $50k in spend just reduced your gross profit by $4500.
You’re spending more to make less. Not a good combo.
But if your BE = $25, then you should absolutely invest that extra $50k
As your profit just went from $200k to $325k !
So how do you know?
Essentially the solution is usually segmenting your data properly & listing the KPIs for each segment separately.
Those segments might be:
- different campaign types – brand non-brand, shopping & display are very different beasts!
- each ‘bucket’ of spend – calculating incremental spend & outcomes doesn’t need to be complicated.
- segmenting your buyers into different groups – for example first time vs returning
- Segmenting your website visitors – by a number of dimensions (location, device & many more)
Maximising profit is a post for another day, which in turn depends on your business objectives. If you want to scale fast, then getting leads for breakeven is the fastest way to grow. If you can cashflow it, you might even want leads that cost a little more than breakeven!
For now, I want to make sure that whenever someone suggests you ‘spend more’ you take a moment to workout the incremental spend (easy) & the incremental gain (harder, but possible).
Think you might be over-spending?
We can help.
We just need to know:
- What you’re currently spending (broken down into those different campaign types)
- What outcome you’re getting
- What your breakeven point is
And we can give you a very quick estimate of where you might want to increase (or decrease) investment based on your business goals.