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Today’s businesses are so relentlessly driven towards bottom-line metrics that they end up being a lot less profitable than they could be.
In this post, I'll explain why creating real sustainable profit may mean throwing out shareholder value metrics.
The modern marketer, especially when it comes to digital channels, has been conditioned to maximize shareholder value through efficiency, challenged to create new customers and activate existing ones as cheaply as possible.
Although we are all conditioned now to view customer acquisition through the lens of CPA (cost per acquisition), it wasn’t always the accepted benchmark.
In addition to coining the terms 'management by objective' and 'knowledge worker', Peter Drucker advocated growth strategies that emphasized growing business through customer acquisition, or 'profit growth by tonnage'.
Later, in 1976, Drucker’s 'The Unseen Revolution: How Pension Fund Socialism Came to America' predicted the negative impact mutual funds would have on corporate innovation: by maximizing shareholder returns, companies would have less cash to build customers, and focus more on efficiency.
Notions of customer lifetime value, and overall corporate value, paled in the face of quarterly profit demands.
Even today, despite evidence that adhering to short-term profit strategy and aligning marketing customer acquisition goals with short-term profit forecasting is largely ineffective, companies continue to drive towards efficiency, rather than spend on new customer creation.
This is the norm in digital marketing, where browser-based technologies (cookies) enable marketers to use their CRM data to 'remarket' to existing customers, and create 'lookalike models' that replicate their core potential customers across the web.
This kind of digital efficiency is truly amazing, highly effective, and cheap. It shows the promise of digital marketing, where companies can take advantage of an “always-on,” predictable, and cost-effective channel to activate customers.
Unfortunately, the way most marketers are handling attribution means it is also the worst channel for gaining new customers.
It is ironic that the most disruptive marketing technologies available to companies are the worst at generating profit, but this is what the modern digital era has had on offer so far.
Digital advertising was born in the direct response world, has been bred on bottom-line metrics such as CPA, and has the genetic infrastructure of one-to-one messaging, via an individual’s cookies.
That means today’s banner ads are really good at finding someone already in the market for your products, and getting them to finally check out their shopping cart.
It also means that banner ads used for branding are being judged by the same metrics as those created for DR campaigns. That means, until the way we measure success changes, online display ads used for branding will always fail.
This is a huge problem for the hundreds of companies who are counting on television dollars to migrate (along with our attention) over to mobile phones, tablets, and laptops
How do we create a new way to value digital branding efforts?
So, what to do? How can companies disrupt the current efficiency construct in digital marketing, and create a new way to value digital branding efforts?
Seen through the lens of Clayton Christensen, author of The Innovator’s Dilemma, modern digital marketing has already entered its third phase in its early lifecycle.
For Christensen, the famed Harvard Business School professor who preaches 'disruptive innovation,' there are three stages in a company’s lifecycle: Disruption, Sustainability, and Efficiency.
After the initial disruptive idea that gives birth to the company, success breeds sustainable practices that prolongs corporate life and expands the company, and that is eventually followed by efficiency—where best practices optimize business operations. Once the company reaches peak optimization, the cycle needs to begin again.
Companies that can’t, or won’t, invest the profits gained by efficiency back into disruption will eventually be disrupted by outside forces.
Today’s digital marketing is approaching total programmatic efficiency. Technology enables marketers to use algorithms to exploit a near-endless amount of inventory, reach individuals wherever they may be found online, and bid efficiency for their attention in real-time.
The only problem with that approach it that it is almost impossible to use it to acquire a new customer. Maybe all it takes is a change in attitude.
What if your attribution goals for display advertising were not to reach your core customer for the least amount of money, but to raise profitability by market?
Put another way, what if your goal was to raise your sales in a particular market from 100 to 120 in a month? If that was your success metric, then it would be obvious that the traditional digital KPIs, such as CTR and CPA, would go out the window. Sometimes the simplest ideas are the most disruptive.
Here are several ways you can reframe your thinking around digital, and start to change the way you deploy this channel:
Connect marketing to the boardroom
Is your client’s CEO thinking about efficiency metrics, or are they thinking, “How do we grow the business by 20% this year?” I guarantee you that it is some form of the latter.
Changing the way your clients (or management) value your digital efforts means getting adoption of new, growth-centric KPIs. Maybe it costs $300 for a conversion rather than $3, but that customer has a lifetime value in the thousands.
How much is a new customer worth in terms of lifetime value, market share, and their ability to bring their social circles into the brand?
As a channel, digital should be thought of as an efficient way to move your ideas into the world and engage new customers, rather than the end of the customer journey through an established sales funnel.
How are new customers influenced?
At the end of the day, no matter how many advertising impressions you have delivered across channels to a potential buyer, people are most highly influenced by their neighbors. That can happen across a dinner table, or in a more scalable way through social networks.
Driving that kind of word of mouth happens at the very top of the funnel through branding efforts, as well as through influencing your existing customers through branding and communication efforts.
Those efforts are the most impactful when it comes to new customer acquisition, but most expensive when judged by today’s KPIs.
Again, the digital channel can be a place to think big, and create a brand, not just drive existing customers into a shopping cart or 'find a dealer' page.
Test and scale
Growing new customers is expensive, and you can’t start nationally overnight. Making a commitment to digital branding means taking a few DMAs, or even neighborhoods, and trying to understand where you have the best chance of growth.
Once you understand how to grow sales in the Upper West Side from 100 to 150, then you understand what it takes to get profit optimization on a market-by-market basis.
Apply the results of each expansion to the baseline strategy, and build profit growth brick by brick.
There is nothing wrong with using today’s highly efficient digital marketing technologies to drive activity among your existing customers.
Programmatic buying is on the ascendancy for a reason: it’s an amazing direct response channel, and it is as efficient as you can get, based on today’s DR-focused metrics.
Bringing true disruptive innovation to your digital marketing practice may mean having to abandon those metrics when it comes to new customer acquisition—and apply some 1973 thinking: profit by tonnage.
When applied correctly, the branding-heavy 'profit by tonnage' approach will be the most efficient way to scale your business, because sustainable profit growth can only come by adding new customers.