Search Engine Marketing: ROI vs. Profits

by Eric Tsai

Search Engine Marketing: ROI vs. Profits
In SEM (Search Engine Marketing) ROI is a safer metric, at the end of the day, than profit.

The pros of going with ROI outweigh profit in the immediacy.

Profit is almost always the primary goal in the long term, but marketers have a lot more control over ROI so programs are designed around this KPI first.

This is a guest post from my good friend David Chung, who used to work with me in Search Marketing and now works for Google in Korea:

Everyone’s getting smarter. Everything’s getting smarter, too.

I recently swapped out my Android mobile device for a traditional flip phone and it took no longer than ten minutes to feel the smart-ness sinking away into a dumb oblivion.

It took ten minutes to feel the urge to enlighten myself with the latest tidbits of wisdom from my social network.

Just ten minutes, and I was already fumbling around with T9 Word trying to reply to a SMS dinner invitation. Instead of “if I’m home by 7” my phone kept trying to write “he im good by p”. So dumb.

Marketers are getting smarter, too. With best practices scratched on every virtual wall, it’s hard to tell which marketing professional has the true edge. I don’t blame you.

We all look and sound the same lately, flaunting tons of white paper lingo like quality score optimization and ROI focus.

Every article, blog, RSS feed, and tweet I’ve read lately talks about making sure your SEM campaigns are maximizing their return on investment.

Here’s my response: Save the white for summer.

Here in Q2, as we start planning our marketing budgets for 2012, we have a responsibility to jump off our “high level” thrones, and start defining viable strategies that will maximize the one thing better than looking good in person—looking good on paper.

Bottom line profits.

But What’s Wrong With Maximizing ROI?

It’s a fair question.

I’ve been asked about this numerous times, and I found the following analogy to help.

Imagine you’re a soda salesperson. Now, you pride yourself on being an amazing salesperson. You can sell ice to an penguin and run of network display media to a direct response marketer.

Your price for a bottle of soda – $1. Now, you can sell that bottle for $100 (because you’re that good), but the problem is, it’s going to take you a long time to move product.

People are getting too smart, and their phones are even smarter. Just one snapshot with Google Goggles, and they’ll know every soda price within a 20 mile radius and the cheapest gas stations to fill up en route to boot.

So, for the sake of example, let’s just say it takes, on average, 3 months of good ol’ fashioned hustling to sell that bottle for $100.

But hey! You just got a ONE HUNDRED to one ROI! Amazing.

In the meantime, your counterpart down the street is selling bottles at $1.25. He isn’t even close to a 2 to 1 ROI. However, it doesn’t take much to move product at this price, and it turns out that your competitor can easily sell 5 bottles a day.

After 90 days of consistent 1.25 to 1 ROI execution, you meet and compare numbers.

The 100 to 1 ROI sounds good, but at the end of the day, the second salesman ends up netting more profits. The first guy made a profit of just $99.

The second guy finishes the same 3 months with more than 10% higher profit—a handsome $112.50.

The moral of this totally, oversimplified story is even simpler.

A campaign’s success is ultimately dressed in black. Black ink bottom line numbers. Profit.

The Difference Between ROI vs. Profits

ROI is a great KPI for monitoring overall campaign health, but it’s just a rate.

So how do we evolve from an ROI-focused approach to one that’s profit-maximizing?

The first step is to understand the relationship between operational profit and your advertising budget.

Your media spend is essentially one of many line items that add up to COGS (Cost of Goods Sold), or the cost of goods sold. Once you’re able to determine average margin of profit on your goods, then factor in ad spend, you can come up with a rough estimate of what your COGS percentage is.

The next step involves some calculation, using the square root rule to predict when you’ll hit diminishing returns on an advertising buy.

Here is an example:

Assume you spent $1,000,000 on marketing last year, generating $3,000,000 sales.

Your profit factor is 35%, yielding profit of $3,000,000 * 0.35 – $1,000,000 = $50,000 .

What would happen if you cut 20% from your marketing budget.

Step 1: Sales = (($800,000 / $1,000,000) ^ 0.5) * $3,000,000 = (0.894 * $3,000,000) = $2,683,282.

The “0.5” number is the square root … you are taking the square root of the ratio in change of marketing spend.

In this case, a 20% reduction in spend yields a 10.5% reduction in sales.

Step 2: Profit = $2,683,282 * 0.35 – $800,000 = $139,149.

In other words, you’d lose a little over $300,000 in sales, but profit would increase by nearly $90,000.

Using the square root rule enables marketers to model hypothetical scenarios, which then enable senior management or your clients to make informed decisions.

Are you losing out on potential profits by depending too heavily on brand keywords, albeit at a 20 to 1 ROI?

Perhaps it’s time to explore non-brand search terms.

Maybe this is an opportunity to expand your program into other channels, such as contextual targeting or a another search engine.

Even if your expansion efforts, on their own, were to yield an ROI of 2 to 1, this still pads your overall profit margin.

Yes, your 20 to 1 ROI will suffer because of the new “inefficient” campaigns entering your mix.

However, at the end of the day, both top line and bottom line revenue increase incrementally.

How to Get the Best ROI Out of Your Marketing

by Eric Tsai

How to Get the Best ROI Out of Your Marketing

The recent update to Google’s content farm algorithm had SEOs and webmasters scrambling to figure out what’s going on as it affects 12% of the search results in the US.

Even if you’re not a hardcore SEO ninja you should know that Google works hard to purify its search data regularly. After all we’re creating as much information in two days now as we did from the dawn of man through 2003.

In addition, with the announcement of adding social context into the search mix, Google just introduced a whole new set of algorithm in an attempt to make search more social.

If you’re a business, you have to overcome disruptive technologies in order to cope with the rapidly evolving landscape of social media and consumer behaviors.

That makes it even more challenging for modern marketers to get a true ROI (return on investment) out of every marketing dollar.

This is why it’s important than ever to have the right approach to creating your marketing strategy.

If you’re going to invest in online marketing you need to focus on the value of what you’re doing. So here then are some marketing ROI advices that I’ve picked up over the years and feel are most relevant today.

Have short-term goals with a long-term outcome in mind

Would you like to get a ton of traffic?

How about more subscribers? Or perhaps you could use a higher conversion rate?

The problem with those questions is that they’re simply too broad and abstract. When setting your goals for social media, SEO or even content marketing you need to know why you’re doing it and what the “specific” expected outcome would be in a given time frame.

And what does getting that outcome mean for your business?

How does that impact the bottom line?

No, I don’t mean in the number of retweets or Facebook likes, but in dollar figures.

In how long and at what cost?

If you’ve decided to invest in a 12-month campaign, you need to first identify incremental goals that you set out to achieve rather than just eyeing the end result.

Looking at your weekly traffic in a given month won’t tell you much, but give it enough time, you’ll be able to connect the dots between cause and effect, that’s when the story emerges.

Too many businesses abandon what might have been a successful strategy had they stick with the original plan. The trick is to focus on getting that first small success to build momentum and confidence.

Marketing Return on Investment

What are the short-term goals? What are the long-term benefits?

Having a short-term goal allows you to stay on track so you can make adjustments alone the way to get to the final outcome you had in mind.

Think like an analyst, act like a startup

We want to know more about our target customer. We want to know when, where, how and why they clicked on our links.

Historically, customer data is what enable companies to increase the effectiveness of their marketing campaigns. But at what cost?

Information has never been so widely available than it is today. The access to data is virtually free but what’s not free is how you translate data into useful insights.

These insights give us actionable steps to take and put behaviors in buckets.

The thing to remember is that all information and data are lagging indicators. They’re good references to help you develop your strategy but ultimately you’re using rational logic on irrational subject matter – human emotions.

It helps to analyze data but Internet marketing strategy requires adaptability.

This means listening to the market then translate the demands of the business environment into an action plan.

Develop your marketing strategy should be like a startup figuring out how to make money or survive until the next round of funding.

Not only do startups have to be nimble, they have to think creatively without just throwing money at their problems.

Social media is the perfect example. Not every brand is ready to let go of their reputation but the choice no longer belongs to the brand. It’s now in the hands of the customer.

This shift in power changes the relationship between business and its customers.

If you can’t change the customer, you have to change your business. Why not make updates to customer service procedures and distribute responsibility across multiple resources?

Change is hard but no business can stay at the top without staying with the rate of change.

Identify potential risks and rewards

Facebook recently rolled out all new Fan Page designs and now may even be phasing out the Share button entirely so how are you ever going to get your return on investment out of something that’s always changing?

This is where you need to make your planning and risk analysis commensurate with the size of your marketing strategy.

For large scale campaigns, contingency plans are critical. Again it comes down to asking the right questions.

If we put our money in A, what’s going to happen to B? If A works, how will we deal with C?

Pay attention to the risk vs reward metrics and know when to cut your losses if a campaign isn’t delivering the result you want. Don’t let your desire to succeed be the enemy of good judgment.

A good place to start is to have a clear justification on the next step with your team’s support or have outside opinions to help bring clarity to your process. Then establish a measurement framework that can be used to determine the value of your activities.

Needless to say, every marketing strategy has its own risks and rewards.

Ask yourself what’s the best scenario? What’s the worse that can happen?

Remember, most successful marketing strategies only works for a short period of time based on things that don’t account for the constantly evolving nature of the market.

When the next Facebook or Groupon shows up, it’s back to the drawing board developing, testing and executing new strategies.

Although all companies face different degrees of these hurdles, knowing how your customer’s behavior is the key to attenuating organizational risk.

Even CMOs worldwide have a dramatic difference in measuring social media ROI. According the eMarketer. “Asked about social media activities with the highest ROI based on older metrics with less of a focus on the bottom line, CMOs were most likely to say they did not know the return from any channel other than their company’s online community. Even Facebook and ratings and reviews, the two top venues with “significant ROI,” failed to win over more than about 15% of respondents..”

As you can see, marketers are trying to justify the value of site traffic, pages views, positive buzz, fans and followers on the impact of conversions.

There is definitely a shift in the way marketers measure social media ROI because in marketing, EVERYTHING is a test.

Know the weaknesses in your strategy

While there are a ton of free valuable content and strategy out there, that to doesn’t’ mean they’ll fit your needs. This is why some marketing strategies fail because of false assumptions based on irrelevant data.

Businesses usually implement Internet marketing strategies and would ask for help for the one of the following three reasons:

A company tried something, got good results and would like to replicate the result continuously but lacks resources.
The company is stuck and needs help to make their strategy more profitable and/or want some advice on how to do it (i.e. usually this happens if the strategy is no longer working as well as it has in the past or just can’t keep up with all the changes) and
Something happened recently and has hurt the strategy’s performance and the company is desperately seeking answers to understand why everything went wrong (i.e. What? Google changed algorithm again and all our SEO disappeared, please help!)

Which brings up an important point – if you don’t know the weak points in your strategy (and execution), it isn’t because they don’t exist but rather you haven’t discovered them yet!

In my experience, no strategy out there doesn’t have some sort of soft spot (or many) whether it’s because it doesn’t work in some niche markets or the audience just isn’t ready for that concept.

For example, according to a recent USA Today/Gallup poll shows that both Google and Facebook attract young, affluent, and educated Americans in large numbers. More than half of those are under the age of 50 with a college degrees and making more than $90,000 a year.

It may sound like a good idea to go after audience in those channels but looking into further details you’ll find that the report went on to say that the data does not include “how many times a week they visit the sites or how much time they spend on the sites, meaning this analysis gauges raw audience reach rather than engagement.”

This means that the report is only a high-level overview of the types of users that are in those channels. Not a good indicator.

Don’t put all your eggs in one basket when making assumptions.

When necessary purchase useful data will save you time and money if you know how to use data to your advantage.

The take away: When looking at your marketing strategy, identify short-term goals that fits into the long-term ROI is where you’ll find value that matches your bottom line.

Many marketing activities are part of an overall strategy that won’t have immediate or direct impact on sales simply because they’re cumulative activities.

Positive marketing ROI are the results of incremental investment in time, money and resources. Just because some activities aren’t part of an ROI calculation, it doesn’t mean their costs shouldn’t be justified.

At the end, it all comes down to this: Business is about continuous profits (doing meaningful transactions) while marketing is about increase profits over time.

And strategy is a process to implement those profit generating activities for the business to measure the effectiveness of its marketing.

So, next time you’re working on a marketing strategy, take the time to ask yourself this simple question – What’s your long-term desire outcome?

The 12 Principles of Brand Strategy

by Eric Tsai

In a situation where you’re selling to multiple personalities, it’s best to first connect everyone on a common ground then articulate clearly what’s in it for each of them.

The goal is to stimulate an engaging conversation that allows us to change perception, diagnose expectations and bring clarity to the dialogue.

That’s the essence of developing a brand strategy – the foundation of your communication that builds authentic relationships between you and your audience.

It is by defining your brand strategy that allows you to utilize marketing, advertising, public relations and social media to consistently and accurately reinforce your character.

Without defining the core strategy, all channels of communication can often become a hit and miss expense.

Here’s 12 brand strategy principles I believe to be the key to achieve business success.

1. Define your brand

It starts with your authenticity, the core purpose, vision, mission, position, values and character. Focus on what you do best and then communicated your inimitable strengths through consistency.

There are many examples of companies acquiring other brands but only to sell them off later because they don’t fit within the brand and its architecture.

Microsoft acquired Razorfish in 2007 when it bought aQuantive, a digital marketing services company, for about US $6 billion then sold it a few years later for $530 million.

Simply put, Razorfish isn’t a good fit with Microsoft’s brand strategy.

2. Your brand is your business model

Supports and challenge your business model to maximize the potential within your brand. Think of personal brands like Oprah, Donald Trump, Martha Stewart and Richard Branson.

These individuals practically built their business right on top of their personal brand; everything they offer is an extension of their brand promise.

3. Consistency, consistency, consistency

Consistency in your message is the key to differentiate.

Own your position on every reference point for everything that you do. President Obama focuses on one message only during his campaign, CHANGE. BMW has always been known as the “ultimate driving machine.”

4. Start from the Inside out

Everyone in your company can tell you what they see, think and feel about your brand. That’s the story you should bring to the customers as well, drive impact beyond just the walls of marketing.

That’s example how Zappos empowers employees to strengthen consumer perception on its brand.

5. Connect on the emotional level.

A brand is not a name, logo, website, ad campaigns or PR; those are only the tools not the brand. A brand is a desirable idea manifested in products, services, people, places and experiences.

Starbucks created a third space experience that’s desirable and exclusive so people would want to stay and pay for the overpriced coffee.

Sell people something that satisfies not only their physical needs but their emotional needs and their need to identify themselves to your brand.

6. Empower brand champions

Award those that love your brand to help drive the message, facility activities so they can be part of the process.

If your brand advocate doesn’t tell you what you should or should not be doing, it’s time to evaluate your brand promise.

Go and talk to someone that works at the Apple retail store or an iPhone owner and you’ll see just how passionate they are about Apple. It’s a lifestyle and a culture.

7. Stay relevant and flexible

A well managed brand is always making adjustments. Branding is a process, not a race, not an event so expect to constantly tweak your message and refresh your image.

Successful brands don’t cling to the old ways just because they worked in the past; instead, they try to re-invent themselves by being flexible which frees them to be more savvy and creative.

Here is an example: when the economy tanked this year automaker Hyundai came out with an assurance program that lets you return your car if you lose your job with no further financial obligation and no damage to your credit.

The results?

As of end of February, only two buyers have taken advantage of this program but it has boosted their sales by 14% year-over-year in Q1, only one of the two companies increased revenue while companies such as Honda experienced a drop of more than 30%.

Follow by that campaign in July, as gas prices expected to push higher during peak summer travel months, Hyundai came out with another program that guarantees a year’s worth of gas at $1.49 per gallon on most models.

8. Align tactics with strategy

Convey the brand message on the most appropriate media platform with specific campaign objectives.

Because consumers are bombarded by commercial messages everyday, they’re also actively blocking out the great majority of them.

Invest your branding efforts on the right platform that communicates to the right channels.

Television may be expensive but it has a broader reach, wider demographics and can produce instant impact. On the other hand, social media may seem cheap but it takes time, resources and may not give you the desire outcome.

9. Measure the effectiveness

Focus on the ROI (return on investment) is the key to measure the effectiveness of your strategies.

Often times it is how well your organization can be inspired to execute the strategies. It could also be reflected in brand valuation or how your customers react to your product and price adjustments.

Ultimately it should resonate with sales and that means profitability. But don’t just focus increasing sales when you could be getting a profit boost by reducing overheads and expenses as well.

Give yourself options to test different marketing tactics, make sure they fit your brand authenticity and aligns with your strategy.

10. Cultivate your community

Community is a powerful and effective platform on which to engage customers and create loyalty towards the brand.

In an active community, members feel a need to connect with each other in the context of the brand’s consumption.

We all want to be an insider of something, it excites us to tell people which community we’re part of and what knowledge we posses.

In many ways it’s our ego that prides us to be part of a sports team or a professional group.

Guess what car would members of the Porsche club consider first when it’s time to purchase their next vehicle?

Brand communities allow companies to collaborate with customers in all phases of value creation via crowdsourcing such as product design, pricing strategy, availability, and even how to sell.

11. Keep your enemies closer

Even if you have the most innovative, highly desirable product, you can expect new competitors with a superior value proposition to enter your market down the road.

The market is always big enough for new players to improve what you deliver better, faster, cheaper. Call it hypercompetition or innovation economics, competition could be good for you believe it or not.

It challenges you brand to elevate the strategy and deliver more value.

Just look at how the Big Three (automobile manufacturers General Motors, Ford, and Chrysler) got crushed in the past decade by competitions from Germany and Japanese.

Not only do their competitors make a better product, they’re more efficient doing it and command a higher brand loyalty.

In 2008, Toyota overtook GM while Honda passed Chrysler in US sales.

12. Practice brand strategy thinking

IDEO’s CEO Tim Brown calls design thinking “a process for creating new choices.”

Essentially it means to not just settle for the choices currently available but to think outside the box without being limited.

This concept actually applies to your brand strategy creation process that I called brand strategy thinking.

It’s always easier to execute tactics than coming up with a strategy because it implies the possibility of failure.

It’s much faster to emulate what worked for your competitor than to come up with something original and creative.

But the truth is, that’s not you and it violates the first principle of brand strategy. Brand strategy thinking is about creating the right experience that involve all the stakeholders to foster a better strategy.

Leverage the ecosystem that includes your employees, partners and customers to help you articulate your brand strategy so they sync together.

The take away: Having a brand strategy will bring clarity and meaning to your brand so you can focus on making, creating, and selling things that people actually care about.

If you could do that, your brand would be unique and memorable on its way to become an esteemed brand.

Are there any you disagree with?

Let me know if I’m missing anything.

Harness That Social Media Bottom Line

by Eric Tsai

This week an interesting question came up during a discussion I had with business owners wanting to learn more about integrating social media into their existing marketing strategy. As expected, the second question hit on the topic of social media ROI (return on investment), specifically it was “Can social media help my bottom line?” I quickly went into a discussion about measuring the result which is sales, and how companies must understand customer profitability in order to make smarter decisions that produce higher profits.

Of course we can use the “old way” of analyzing impact such as clicks, eye balls or traffic, but those are limited not to mention unproven at this point. We’re still at the “testing before the test gets developed” stage before a solid method of measuring social media ROI is meaningful. However, it’s about time that we all try to find meaningful metrics that truly justifies the investment.

Accordingly to the research report “2009 Marketing Industry Trends” from Equation Research, the top 4 ways to track social media efforts has little to do with directly tracking sales. The survey suggested that “measurement is understandably dispersed. Yet there is an acceptance that both hard and soft measures need to come to bear in order to assess success.” Now these guys know something and it’s a start to drive and refine testing.

smmeasure

Social media takes knowledge, time, energy, training and it gets frustrating when results don’t reflect the effort put into it. In a recent article “Social Fresh, good friends, and the definitive Social Media ROI presentation”, Olivier Blanchard generously laid out a tell-all truth about social media ROI proof of concept methodology. If you speak business (not just marketing), I encourage you to checkout his blog and the slide presentation.

Looking Ahead

Organizations should remain focus on the most profitably customers and align their brand strategy around them while targeting potential customers with similar values. By recognizing the different variables that influence customers to buy or not to buy, companies can make better informed decisions to nurture high-profit customers.

Whether you’re a start-up or a Fortune 500 company, there is a ceiling for your economy of scale so consider building your marketing strategy around the products and services to those life-time value customers. Then abstracting soft and hard measures in analyzing social media ROI should become more effective and meaningful.

Getting started with social media is easy, engagement becomes accessible and shouldn’t you be authentic already anyway?

Social media is about having the “right” conversation but ultimately they have to mean something. From buzz to leads, word-of-mouth to rewards program, everything translates to revenue. Yes, it’s about money. There is this perception that people are connected on social network because of alternative motives and sooner or later you’ll be spammed. Well, what do you expect? Do you really think that Google wants to give you free email? Or that Facebook truly care about helping you to stay connected with your friends?

There is really only 3 ways to make money on the internet: sell subscriptions, sell software, or sell ads. When it comes down to it, it’s simply friends with benefits.

Develop your own social media ROI starts with knowing your customers. In an attempt to influence your audience through direct contact, repeated communication and word-of-mouth campaigns, don’t forget about business performance. Find a combination of variables to measure, but whatever you decided to do, it’s important to let the balance sheet do the talking at the end.