Optimizing Towards Profitability

Marketers far too often get caught up in chasing campaign-level metrics. Instead, your digital marketing should be measured, optimized, and invested in based on the same goals you have for your organization. By optimizing towards profitability, instead of a specific target metric, you’ll avoid self-imposed limitations on revenue growth and maximize the effectiveness of your marketing efforts.

The key is viewing your digital marketing as an investment. It cannot be viewed as an expense. When it is, the discussion almost always goes to “only run on the most cost efficient and immediate return tactics”. When this happens, a bonsai tree effect is created. You have effectively trimmed away any opportunity to gain revenue growth, market share, or business growth – you know, those business goals you have for your organization – all due to misaligned digital marketing measurement, focusing on return efficiency, because it’s viewed as an expense instead of an investment.

If you are struggling to find success from your digital campaigns, you see yourself constantly switching agencies, or you have a hard time justifying the budget for digital marketing each month, you could likely be in this vicious Bonsai effect cycle. Here’s a scenario that will probably sound all too familiar:

Goal: ROAS is the main KPI

Direction given to the digital marketing team is “all digital spend must result in an overall ROAS of 2000%”.  The team then eliminates all digital marketing channels, strategies, and tactics that do not produce a 2000% ROAS. And so, the digital marketing “expense” is now minimized to $1,000 in spend, and total return is at that goal ROAS. Sounds ideal, right?

Well, what if by not bonsaiing the digital strategy based on an efficiency KPI, the campaigns could have returned additional revenue but at a lower ROAS. Here’s the scenario:

SpendRevenueROAS
$1,000$20,0002000%
$5,000$50,0001000%

ROAS is at goal at a lower cost. Most often that is viewed as success when digital marketing is an expense. But let’s take a deeper look when we apply business goal metrics and view digital marketing as an investment. Same scenario:

SpendRevenueROASGross ProfitGross Margin
$1,000$20,0002000%$19,00095%
$5,000$50,0001000%$45,00090%

If business and revenue growth are the goals of the organization, would you not want the additional revenue at only a slightly lower margin?

We can take this even a step further and factor in the more important NET profit margins for a company.  In this same scenario, let’s assume the company’s net profit margin is 60%:

RevenueNet MarginSpendNet Profit
$20,00060%$1,000$11,000
$50,00060%$5,000$25,000

Once again, the investment strategy drove the digital marketing campaign toward the goals of the organization.

We fully understand that increased spend doesn’t always return as well as in this example. There is always a point of diminishing return. But the only way to identify new growth opportunities and truly align digital marketing efforts with the goals of your organization is to be committed to investing in your digital marketing and to strategically measure and optimize your campaigns.

This is where Lever’s expertise comes in for our clients. With that understanding of our clients’ business goals combined with our experience and technology, we are able to measure and optimize our clients’ digital campaigns based on profitability and growth.

We are able to utilize custom profitability KPI metrics at a granular level –  by channel, ad group, keyword, product, or service – and combine that with machine learning optimization to ensure our clients are hitting their profit margins, while also identifying the new opportunities to invest in for further growth.

In order to do so, we must also uncover the weight and success of our client’s cross-channel digital efforts. As highlighted in our 2019 Digital Trends video, Lever Interactive is researching and testing the application of attribution to better capture the true customer digital journey and the impact of digital marketing on the overall business. Be on the lookout for our next post that will be introducing a series that is studying the application of attribution.

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