In marketing in Italy we are constantly immersed in endless discussions about "performance" and "sales results", as if 1) this discipline were equivalent to commercial and had to limit itself to bringing sales with each campaign and each operation, without any interest in strategy, quality, satisfaction, brand strength and long-term growth, 2) it was easy and realistic to manage attributions and results of individual campaigns in an atomic way and separated from the rest.
I continually see tutorials, courses and Excel sheets that promise, with the sole calculation of the ROAS (return on investment) for each single campaign, to understand the trend of marketing, to orient it, to create an entire strategy, to make everyone become millionaires.
Exactly like thinking of controlling an entire 747 from takeoff to landing by moving the flap lever.
Illusions of a country that is increasingly drifting into provincialism due to training gurus and fuffaguru, inexperienced agencies, inability to see. Every single piece of scientific evidence shows how this short-sighted marketing approach oriented only towards easy sales for a single operation always leads to defeat or suboptimal results in turnover.
In this article we will try to give you a more professional approach, from an agency, from a real and not improvised marketing office, analyzing the economic indices in their correct context. We talk about sales and money, but in broadest and most correct sense.
The understanding and calculation of crucial metrics such as ROAS (Return on Advertising Spend), MER (Marketing Efficiency Ratio), LTV (Lifetime Value) and CAC (Customer Acquisition Cost) is in fact fundamental for the success of a business strategy.
ROAS is an indicator of the profitability of advertising expenses. It is the simplest and most overused version of economic indicators in our discipline because it is superficially easy to understand and calculate. Just like when you overindulge in sweets, the abuse of ROAS however generates addiction, a shapeless physique, and a certain weakness.
ROAS is calculated by dividing the profit generated by an advertising campaign by its cost.
What's the problem here? Many. And almost all invisible to inexperienced people, companies and gurus:
This does not mean that ROAS is absolutely harmful or demonic, but, in practice, knowing how to use it in the correct context is very difficult and should only be considered if you are a long-time professional.
Let's now look at better indices.
The MER provides a broader view of marketing effectiveness by including allmarketing expenses, not just advertising ones, and considering allsales. Compared to ROAS it is much more difficult to calculate because it requires the calculation of much more information and flows. However, it is definitely more powerful.
It is obtained by dividing the total revenues by the total marketing expenses on each channel over the same period of time, which must be quite long, typically at least one year.
While ROAS focuses on the immediate return on advertising costs of a specific advertising operation, MER evaluates the overall effectiveness of marketing, including both conversion and branding and awareness activities brand. Branding activities and those at the top of the funnel are indeed crucial to building brand awareness and consumer trust, but often do not lead to immediate conversions, thus escaping measurement through ROAS.
The use of the MER also allows companies to have a more complete vision of the impact of their marketing activities, allowing them to better balance expenses between direct conversions and brand building. Finally, it allows for better strategic and economic forecasting capabilities.
Let's see a practical example, so as to better appreciate the issue.
VegStark is a start-up that produces excellent, healthy and delicious organic soy burgers. A fund has acquired many shares and expects explosive sales results for next year: as many as 20 million euros!
Obviously it is a very intense business in terms of work and with high costs. The expected gross margin will therefore only be 20%, 5 million euros. To obtain the expected 20 million, 4 million will be allocated to marketing, with a contribution margin (net profit + fixed costs) of 1 million euros.
WED calculation: 20/4 = 5
Definitely an optimistic MER, probably unachievable. If I were the marketing director, I would diversify the strategy and prepare a plan B to keep marketing costs under control.
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Let's now proceed with two other exceptional indices, before having the complete picture.
We see two other economic elements that are important and often cited in discussions in the context of marketing.
LTV represents the total profit that a customer generates for the company during his relationship with it. It is calculated by considering the average profit per customer, the average purchase rate and the average duration of the customer-company relationship.
CAC is the average expense necessary to acquire a new customer. It is calculated by dividing the total marketing expenses by the number of new customers acquired.
The problem with CAC is that, by definition, it refers only to new customers acquired and not to all customers in the broad sense and on channels where it is not possible or easy to track the conversion of new ones . So great for startups, rather inflated and out of place for many other brands. For this reason, in the next lines, we will use a less specific but more useful CAC.
In the real world it is difficult for a brand to calculate LTV, CAC and MER, even if from many points of view they are the Holy Grail of business. Curiously, we continually talk about these indices in a qualitative way , confused and taking them for granted, while in our experience companies need practical, quick and dirty advice, and little from a "TED Talk". For this reason, we try to give an operational procedure to connect MER, CAC and LTV with very feasible calculations for small and medium-sized brands, so as to make them operational and useful, and not just beautiful icons to admire and comment on randomly:
At this point we havethree fantastic indexes that tell us a lot about our business; and above all that they give us a continuously updated map to follow over time to understand how much our brand is improving. For example, every beginning of the month we can take the time period (rolling window) of the last 12 months just concluded, and automatically calculate these indices, then plot them on a graph and see how they are moving, month after month. And here, do analysis.
Attention: if a company invests in both sales and marketing, it must be understood whether to isolate the two items or aggregate them into "total marketing expenses". A non-trivial choice.
Let's face it: as much as we've made things pretty simple in this article and brought the calculations "down to earth" in any way possible, it is clear that we are not talking about animals that are easy to manage. They are ferocious beasts. Not so much for the formulas that we have made manageable here, but for the analysis of the indices and the relationships between them.
For this reason it is necessary to rely on strategic partners with long experience in marketing and business, who support us and give us a compass to give the correct interpretation to all this without making us go wrong.< /p>
Deep Marketing, with its senior managers and a long list of successful clients, is here for you. If you need help, don't hesitate to contact us without obligation.
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