Building a Brand versus Getting Direct Response

Marketing has become extremely easy to track.  Measuring your ROI from your marketing spend, especially online, is available to everyone.  I have seen this cause a shift in the way people market.  Most brands I speak with are looking for their CPA.  How much do they spend, and how many customers or how much revenue does that bring in?

The issue is, the long term goal of brand building is suffering more and more.  Here, I will outline the benefits and tactics of building a brand versus driving direct response.

Brand Building

Building a brand is the backbone of any long term, consumer facing business.  What is the lifestyle around your products?  Why do I want to give your company money? The most important questions consumers ask and the only way to answer is with a strong brand.

If you want to:

• Build long-term customer engagement
• Bring in evangelists
• Create a long-lasting company
• Increase long term revenue
• Engage your customers on an emotional level

Then you need to focus on building a brand identity.

The issues with focusing on building a brand are:

• Lower immediate ROI
• Higher risk (with the results being more long-term, you are generally going to spend more money before seeing results)
• Hard to track response

Direct Response Marketing

Direct Response is marketing done to make the the largest immediate ROI.  It is extremely tempting for companies to focus on these marketing channels because they can see the affect to their bottom line immediately.

If you want:

• To increase revenue in the short-term
• Show immediate growth
• Closely gauge your financials and ROI
• Lower your risk

then direct response is the way to go.

The issues are:

• The long term benefits of direct response are much less
• Customers are generally driven to purchase your product, but are less emotionally engaged, which means less likely to return or share
• Does not create an identity for your brand, which hinders long term customer engagement

Conclusion

When deciding whether to build a brand or get direct response, make sure you understand the value of both.  Most companies can benefit from a mix, but if you are in it to create a long lasting product and company, do not sacrifice building your identity, for your immediate returns.

For any questions or comments, please feel free to email erik@hawkemedia.com

The 5 Key Metrics to Analyzing your eCommerce Business

Many eCommerce sites are completely missing one or more of these key metrics.  The most important data points about your business.  Without knowing each and every one of these points, there is no way you can know if your business is sustainable.  Make sure when starting out, you are tracking every one of these metrics so that you know if you are going to survive, let alone make money.

CPA (Cost in Marketing to Acquire Each Customer)

CPA is your main marketing metric.  You calculate this by taking your marketing spend and dividing it by newly acquired customers.

i.e. Let’s say you spent $150,000 in marketing in the month of July.  Now let’s say that you got 7,500 new customers during July as well.  You would calculate your CPA as 150,000/7,500=20.  Your CPA during July was $20.  That means that for every $20 you spend given everything stays the same, you will get a new customer.

LTV (Lifetime Value)

Now that you have your CPA, it is extremely important to know your LTV.  LTV is measured by the average amount of revenue generated by a customer in their lifetime.  When analyzing this, it is also important to know how long this lifetime is usually as well (do they spend mostly over 3 months, 6 months etc.), that way, you can then calculate an estimated ROI taking your CPA and your LTV.

Let’s say that using the same case as above, the LTV of your customer is $200 over 6 months.  Now you know that, if all things remain constant, if you invest $20 in your business, you will make $200 over 6 months.

Gross Margin

This is where a lot of ecommerce businesses aren’t looking.  You have your LTV, but that is just based on revenue.  What percent of that do you actually take home after your cost of goods?  To calculate this you take your retail price, let’s say it is $50, and then you take the cost it takes you to get it out the door, let’s say this is $20.  You take 50-20=30, then 30/50=.6 which means your Gross Margin is 60%.

This means 60% of the revenue coming in actually goes to your business and the other 40% goes to cover the goods you are selling.

Overhead

Keep your overhead low!  All the costs of running your business other than your goods.  Your employees, office, equipment, anything at all that you are spending money on to keep your business open.  Make sure you know what you are spending (this may seem obvious, but you’d be surprised how many people don’t know this number).  Taking the case from above, let’s assume that your overhead is $50,000 per month to pay yourself, your employees, your office rent, equipment and all of your business expenses.

Profit

Don’t let anyone tell you this number isn’t important.  You want to make money and this is where you do.  Focus on getting your “bottom line” or Profit up by make sure to keep your costs under control as well as growing your revenue.

Now let’s look at the examples.

$20 CPA

$200 LTV over 6 Months

60% Gross Margin

$50,000 Monthly Overhead

$150,000 spent for 7,500

This means:

You will make $1,500,000 in revenue over the next 6 months (7,500 customers x $200 LTV)

$900,000 after your Cost of Goods are covered (1,500,000 * 60%)

Your overhead will cost $300,000 over the next 6 months (50,000*6)

After 6 months you will end up with $600,000 (900,000-600,000)

So if you invest $150,000 in marketing, it will take approximately 1.5 months to make that money back (150,000/(600,000/6 months)) and then you will make approximately $450,000 profit over the remaining 4.5 months.

Recap

CPA, LTV, Gross Margin, Overhead, Profit

Know these key metrics and you will know how to analyze your business.