Success stories about the ability of performance marketing companies to grow rapidly abound. A few companies have been able to sustain a compounded growth rate of 30% to 50% per year. More important, many companies have been able to increase business at a rate of 15% per year for long periods of time.
While available figures documenting the phenomenon are not absolute, it appears that performance marketing activities represent one of the most significant business growth areas.
What strategies have performance marketers used to achieve this growth? How should companies seek growth in the future? These questions are of critical importance to ecommerce businesses, who are, after all, a major segment of the industry.
The Basic Strategies for Growth
In essence, there are four ways you can grow an existing performance marketing business without the launch or acquisition of a new activity. You execute an overall strategy by:
- Investing in new customer acquisition
- Investing in the development of new media for presenting offers
- Adding products or services to the line
- Expanding the number of times that customers and prospects are contacted
The key decision is how you should allocate available resources among the four types of investments to optimize growth.
Measuring Your Growth
In addition to the sheer delight of creating and building, most organizations seek growth to improve financial performance. The standard by which financial performance is measured, however, has a great influence on the selection of growth strategies.
Therefore, before your organization can work out its strategy for growth, you must settle on its principal financial goal. There are four basic types of financial goals:
- Building sales. Often this is particularly important in the early stages of a company’s development. Investors, suppliers and customers are impressed by size. A new company’s ability to build sales quickly is considered a sign of success. Moreover, once demand has been established, profits can be “engineered” by reducing various cost factors.
- Maximizing the absolute amount of profit. Whether your company has a single stockholder or a large number of owners, the absolute amount of earnings – the profit per share – is of considerable importance.
- Increasing profit as a percentage of sales. Sometimes referred to as return on sales or ROS, this is another frequently used measure of financial success. Companies that must raise substantial amounts of money from stockholders or institutional lenders pay close attention to this standard, as does every organization in the long run.
- Maximizing return on investment (ROI). This is perhaps the most sophisticated and, ultimately, the most meaningful measurement of financial success. It is the amount of money returned per unit invested that determines the real success of an activity. The bigger your organization becomes and the more sophisticated its investors, the more it will seek to maximize ROI.
Performance / direct marketing ventures are notable for the relatively small investment needed. Performance-based marketing per se does not require extensive amounts of capital equipment. For many companies, the principal investments are in inventory, promotional materials and accounts receivable.
In the performance marketing environment, you have to measure ROI in terms of the value of cash flows generated over time. There are two popular measures of ROI you can use:
- If there will be a large initial expenditure followed by a series of positive cash flows, the Internal Rate of Return (IRR) can be calculated. IRR is the single rate at which the initial negative and future positive cash flows would have to be discounted in order for the net present value of those flows to be zero. This rate should be compared to your firm’s cost of capital, as well as the rate of return on alternative uses of capital.
- If there is no significant initial outflow, then a targeted ROI rate should be applied to the anticipated future cash flows to determine the Net Present Value (NPV) of those flows. The NPV of future profit flows under alternate scenarios can be compared.
Using either measurement, it is not uncommon for the return on investment in performance marketing activities to exceed 25% or 30% within five years.
Risks and Constraints of Your Growth Initiatives
The financial return of each growth alternative, or combination of alternatives, should be weighed against the associated risks which, in turn, vary with respect to different growth modes.
The following types of risk are encountered most often in performance marketing.
- Investment risk – the additional funds required for such items as:
- Promotion expenses
- Inventory and carrying charges
- Accounts receivable
- Staff buildup
- Working capital
- Facilities and equipment
- Response risks – the variance in expected response, or the confidence that can be placed in projected outcomes.
- Marketing and merchandising risks:
- Altering a successful merchandising character
- Alienating people in the customers database / “house file”
- Cannibalizing other promotions
- Acquiring poorer quality customers or prospects
There are also constraints that restrict the ability of organizations to implement growth strategies. Capital limitations are frequently encountered in all businesses. A more subtle inhibitor unique to performance marketing is the difficulty or impossibility of finding additional traffic sources, prospect lists, or media that are efficient and effective in reaching a targeted market.
Growth Strategies in Detail
Growth strategies adopted by your organization must pursue the selected financial objectives to the extent that the risks warrant and the constraints permit. Keeping this in mind, individual growth strategies may be examined in more detail.
Acquire More Customers
The most common method by which performance marketing sales are built is investment in the acquisition of new customers. For most companies, this is done by placing more online, print or broadcast advertisements or mailing more emails or direct mail pieces to rented lists.
Strategies for financing customer acquisition vary. Some firms have set a target of earning a profit on these activities. Other firms engage in any promotion that will at least break even. Still others will invest money to acquire a new customer, recognizing that future sales to that customer will produce a profit.
How much money should be spent on customer acquisition? The best answer to this question is derived from relating the amount of investment required to secure a customer to the future profits that the customer will provide.
If you are promised a flow of profits over the next several years which has a current value of $20 when discounted to the present, how much are you willing to spend – $2? $5? $10? Your answer will reflect the risk that you see in the venture, that is, your confidence in actually earning the $20, as well as the alternative investment opportunities available to you.
This is really the decision that a company should make in fixing its investment in customer acquisition.
A key in this determination is studying the Lifetime Value (LTV) of groups of customers acquired in different ways. Lifetime Value is the future flow of profits from a pool of customers, discounted back to the present and divided by the number of customers in the pool.
If the long-term financial objectives of your organization are to maximize sales or ROI, it is probably safe to generalize that the company would fall short of either goal if it is not prepared to lose some money to acquire a pool of customers which will yield profits in the future.
Companies that insist on customer acquisition programs in which every effort, traffic source or advertisement makes a profit or breaks even probably are not growing as fast as they might.
On the other hand, large expenditures for customer acquisition often have the greatest negative impact on cash flow. The lower the ratio of future LTV to the amount that is invested to acquire a pool of customers, the longer it will take for the shift from negative to positive cash flow, and the lower will be the ROI.
Thus, you have to plan carefully the extent of investment in customer acquisition. In general, it is advantageous for your company to invest at least a small portion of a customer’s LTV in acquiring that customer.
Expand the Promotional Media You Use
Many performance marketers have arbitrarily limited the array of media they employ. The most common performance marketing media are Google Ads, Facebook ads, emails and general social media presence. But then there are broadcast TV/radio and print advertisements, brochure or solo product direct mailings, and inserts in billing statements or packages, telemarketing calls, and many more. How many performance marketers have never tested some of these basic media?
Performance marketers, both in B2B and B2C markets, regularly fail to place inserts in the merchandise they ship. Ecommerce and general online sellers often dismiss the idea of direct mailing small brochures featuring selected products or calling their customers by phone.
Companies that have built their business selling a broad array of products often lose sight of the possibility of creating specialized print catalogs or personalized email campaigns that bring deeper assortments in a few product categories to the attention of customers who are especially interested.
Even the question of how many marketing campaigns conducted via paid media a company should produce each month or year to acquire new customers has not been answered fully. Most companies that once conducted only two email campaigns a month now have added a third and fourth.
Large ecommerce companies now produce personalized, behavior-based email campaigns that are sent out on a daily basis and those in the large-scale online media buys pour their advertising dollars as long as they break even or max out at a preset maximum cost-per-order figure.
Companies that “rediscover” small flyers, free standing inserts, or radio ads as supplemental media add extraordinary flexibility to their media mix. Your company must determine for itself what is the ideal combination and amount of media.
Expand the Product Line
Many performance marketers, especially those into ecommerce, have an option to add products to their lines and increase the size of their ecommerce offerings. Ecom marketers usually make some effort to evaluate each item in their campaigns on the basis of profitability, taking into account cost and the amount of space used. On the basis of such information, a determination can be made rather quickly as to what percentage of items in the active campaigns are profitable.
While each company must work out its own criterion, one good rule is that paid media ecommerce campaigns repeating about 80% of the products from prior campaigns should consider adding more products to its landing pages, emails, Facebook ads etc. if 75% to 80% of the campaign’s items are profitable.
The decision rule becomes a little more tricky as the percentage of repeat items diminishes, but a company that repeats only 50% to 60% of its items might consider adding to the size of its campaign offering if 65% to 70% of its items are profitable.
It should be emphasized that these guidelines are approximate, and probably conservative. But the point is that many companies have overlooked the opportunity to achieve growth by offering more products.
- To identify products that could be added to the line, firms selling to other companies should look especially at accessories, supplies, peripheral equipment and other items related to the products they already sell.
- Firms selling to consumers should examine current product categories that have high profitability and success rates and should seek especially to extend price points and to offer a greater selection at the most popular prices.
At the same time, you must be careful not to add too many products simultaneously, be sure to set up tests to analyze as thoroughly as possible the impact of product line extensions, and be certain that added items are consistent with your company’s mission and established merchandising character.
Expand the Number of Contacts Made to Existing Customers
Contact strategy refers to the decision as to how many times each customer segment will be contacted each year or each season or each month. This is not the same issue as either database segmentation or development of promotional media.
Segmentation specifies who will be reached. Media selection specifies how offers will be delivered. But contact strategy refers to a positive commitment to reach designated buyers and/or inquirers a specified number of times.
Performance marketers sometimes neglect to establish a contact strategy.
There is little or no evidence that a high volume of contacts per se hurts the responsiveness of any customer or prospect group. The fact that the larger ecommerce firms reach their customers with basic media at least 20 times a month is worth mentioning.
I know of some companies that reach portions of their customer lists 30 to 50 times per month, via different media.
Many ecommerce marketers may use, starting tommorow, the simplest form of increased contact by resending an existing email campaign or setting a higher retargeting capping to the best portions of their customer database.
This action has been so obvious and so profitable that it is hard to imagine why it has not been general practice for a long time.
But how many companies have approached the problem by saying that a portion of their customer database could support 18 or 20 contacts per month, while another portion should have 12 or 13, another five or six, and another one or two?
Identification of such opportunities to make additional contacts provides you with a strong impetus to the development of additional media that would permit the contacts to be made profitably.
It also should be recognized that an increase in the number of profitable contacts that can be made to a pool of customers will serve to increase the lifetime value of that group. Indeed, the impact on LTV of a change in contact strategy is very substantial.
Interrelationships Among Growth Strategies
By now it has become clear that the four growth strategies have great impact on one another. A few examples might dramatize this point.
As more performance marketing companies have reached substantial size with sales climbing over the $100 million mark, the economies of scale have become more widely documented and more impressive.
At every turn, size brings advantages. Online inventory, print space and broadcast time can be bought at lower prices. Campaign production costs can be reduced. Mass transaction handling techniques can be applied to operations to reduce expenses in many ways. Fixed costs can be spread over a larger base of sales.
Strategies emphasizing customer acquisition and greater numbers of contacts serve especially to obtain these economies of scale. As the economies are achieved, the cost of media reduced and profitability increased, the volume of customer acquisition activity can again be enlarged.
Both media expansion and an increase in the number of contacts usually produce the highest return on sales and the fastest positive cash flow. These, in turn, raise the LTV of customers. This permits a greater absolute expenditure to acquire new customers while holding to the same ratio of customer acquisition cost to LTV.
Product line expansion usually produces a combination of higher order size and higher response rate. In some situations the effect is seen more heavily in the former, while in other situations it is felt more strongly in the latter.
A larger order size tends to have a greater impact on ROS while a higher response rate brings more customers into the better segmentation categories that support more contacts. Any increase in sales, which is the product of order size and response rate, improves the results of customer prospecting efforts, as well as the LTV of customers acquired.
Optimizing Growth Strategy
It is clear that each venture is affected differently by the strategies discussed above. Some companies may have reached the limit of their capability along one or more of the paths indicated.
Various cost structures can make some strategies less attractive than others. Risk preferences may differ. Some companies may be more adept at locating new products or initiating new promotional media.
Finally, some companies simply are better merchants than others and can produce higher sales per thousand persons reached.
Timing and staging also have a good deal to do with strategy selection. Some companies will achieve their objectives most readily by pursuing one strategy for a while and then shifting to a second. Other companies will be best served by implementing several strategies simultaneously.
Some companies have limited capital and could not pursue any of the strategies to the extent that they might like. Others have access to sufficient capital to give them a wide choice.
Data modeling appears to offer the best way to investigate strategy variations and to select and balance strategies in such a way as to optimize the financial performance of the organization.
In any event, the determination of an optimal growth strategy is rarely a simple process. It will be successful only if the repercussions of each growth alternative, and combination of alternatives, is thought through in detail. There is no other form of marketing in which the participants are better able to engage in this process and arrive at a strategy with more confidence and insight.