How Long Ago Was Your Quarter Baked?

When a friend congratulated Jeff Bezos after a great quarterly-earnings announcement, he famously said “Thank you, but that quarter was baked three years ago”.

This long term thinking might feel like a luxury in your business, but without it you won’t be able to build a strong enough foundation to support future growth. When you’re the CMO of an already well-established brand, the majority of this quarter’s sales will come from sound investments made long ago by your predecessors. Your job is to act as a responsible steward for the brand and make long-term decisions that secure the brand’s legacy.

However short-term tactics have their place: 9 in 10 startups fail, so it makes sense to do everything you can to beat the odds. But these short term spikes become addictive, and even if you manage to hit your numbers this quarter, each quarter in the future is just going to get harder to hit. As your company grows, the allocation between short and long term initiatives will need to change, or you’re setting your brand up for failure.

To understand how to make the tradeoff between the short and long term, you need to understand the stages of the marketing funnel, and how they work together.

Lower Funnel – Direct Response

Out of everyone in your target audience, only a small percentage of them will be “in the market” at any given time, ready to buy. Some of these people will have a favorite brand they like, others will pick up whatever brand they recall, and many will ask friends and family for recommendations. The share that’s left over is what you’re competing for when you run search ads, partner with affiliates, or retarget website visitors.

These channels are remarkably proficient at driving sales today, but as soon as you turn them off the sales will quickly drop to zero. These channels are highly measurable, because you’re targeting the right people at the right time – if you get them to click on an ad, they’re likely to make a purchase shortly after. Some of the customers you acquire will buy again, but the fact that they were comparison shopping in the first place means they’re probably price sensitive, with limited lifetime value.

This can still be a substantial market segment, and it’s the share of the audience that’s most likely to buy your product if you’re competitive against the other advertisers bidding for them. For a small business or early stage startup, acquiring even a small percentage of this audience can be enough to make your quarter. These ad platforms are bought on a self-serve basis, which makes them accessible, and you can start small to test if it’s working.

Mid Funnel – Delayed Response

Eventually the lower funnel audience won’t be enough, and you’ll need to switch from harvesting demand, to generating it. Although only a small percentage of your target audience will be thinking about making a purchase, a much larger share would be capable of buying if they had sufficient motivation. If they read the right article, see the right celebrity endorsement, or watch the right video, they could be convinced. As direct response channels get saturated by competitors, you can gain an edge by broadening your targeting to those potential customers who are less expensive to reach.

Running video ads on Instagram, TikTok, or YouTube, hiring influencers to post on social, or doing content marketing all tend to get bucketed in with performance marketing, but in reality the economics are completely different. The media costs for these channels are lower, because they’re targeting audiences that haven’t shown intent to purchase. However, that means you have to put more resources into producing the creative, because it must be compelling enough to motivate them to buy. Unlike direct response where people come in and out of the market, you’re targeting the same audience with the same ad multiple times, which causes ‘ad fatigue’ necessitating frequent changes to creative.

Most people in this funnel segment won’t be immediately ready to buy, so there’s a lagged effect to account for, representing the delay between click and purchase. The impact of this month’s campaigns won’t fully manifest until next month, so there’s some bleed between quarters. Many of your sales from these channels won’t be directly attributable to the channel itself – they’ll show up weeks later when someone remembers to search for your brand name, gets reminded by a friend, or notices your brand elsewhere.

Upper Funnel – Branding

As your business matures, you’ll need ever greater numbers of new customers to hit your targets each quarter. To hit your numbers today, you needed to have made the necessary investments in previous quarters or even multiple years ago. Brand advertising works through building and refreshing memory structures in consumer’s minds, so that when it’s time to buy they remember your brand. To do this you need to reach your entire target audience through harder to measure channels like TV, magazines, or billboards, with more emotion and cultural meaning than the more functional messaging you run in the lower funnel.

Much of the audience you target won’t be likely to buy for months or even years. You’ll even need to invest in reaching people outside of your target market, given that they hold some influence over your ideal buyers. As Kevin Simler outlines in “Ads Don’t Work That Way”, the consumer has to see the ad, but they also have to know that everyone else has seen it too, or buying that brand won’t signal anything about their identity. To some degree, brand advertising works through a costly signaling mechanism: any brand that has enough money to run a SuperBowl ad must be of a certain size and legitimacy. As Tim Ambler said, “The waste in advertising is the part that works”.

While most marketers are convinced of the long term value of a brand, making the case for investing in it can be difficult. The average tenure of a CMO is 3.5 years, the shortest in the C-Suite, so much of the benefit will come after you’re long gone. If you don’t hit this quarter’s numbers because you diverted money to branding, your tenure might be cut even shorter. You’re asking for millions of dollars today, for some undefined long-term effect that will be hard to measure. However, you know that the longer you put this off, the harder it’s going to be to consistently hit your targets.

The Tradeoff Between Long and Short Term

I came into marketing as a performance marketer, because given my economics background I was attracted to the ability to scientifically test what was working, and get immediate results. However, I was also fortunate that the marketing agency I co-founded was incubated by a traditional creative agency, BBH, which gave me a healthy perspective of the value of a brand.

Having one foot in each world, I’ve seen performance marketers bemoaning the lack of accountability in how brand marketers operate, while brand marketers dismiss performance marketers' naive obsession with optimizing only what’s easy to measure. The enemy isn’t short-termism or long-termism, but ‘wrong-termism’, as Tom Roach (ex-BBH Head of Performance) puts it. Invest only in the short term and you’ll eventually run out of demand, but invest only in the long term and you won’t be around to benefit.

Any discussion about this tradeoff must mention Binet & Field’s seminal work, “The Long and Short of It”, which recommends a 60:40 split between brand (long term) and activation (short term). This strikes
me as a good rule of thumb, though the authors do concede that this isn’t a hard and fast rule that suits every category and company stage.

They provide the following breakdowns by company stage:

• 1st year: 65% for activation and 35% for brand building.
• 2nd year: 43% for activation and 57% for brand building.
• Maturity: 38% for activation and 62% for brand building.
• Leadership: 28% for activation and 72% for brand building.

The pattern is that as the company matures, you spend less on short term, lower funnel activities, and invest more in branding to fill up the top of the funnel. Whether you follow these recommendations or derive your own based on analysis, the important point is that you avoid neglecting any one stage of the funnel. Invest across lower, mid, and upper funnel activities with an appropriate allocation will ensure you generate and fulfill demand in equal measure.

Filling 3 Buckets of Water

Having worked with over 200 early stage startups (as well as a handful of Fortune 500s), I’ve developed a practical way of thinking about this problem, imaged as filling three buckets with water. It’s the inverse of your marketing funnel, in that the top bucket is your direct response campaigns, which gets filled first. When they can’t take any more water, excess goes into the delayed response bucket, and the brand bucket is filled up last when the other two buckets reach their limit.

In practice it works as follows:

• Max out your direct response channels until they’re fully saturated
• Expand to delayed response until you start to hit ad fatigue
• Invest in branding with what’s left, until capacity increases

This means you’re always investing an appropriate amount in the short and mid term, without sacrificing the long term. It’s far easier to make the case for longer term campaigns when you can show that your short term campaigns are reaching the limit of efficiency. This also maps nicely to company stage, in that early stage or small companies might only need to worry about the first bucket, whereas for larger more mature companies the branding bucket will be bigger.

The Direct Response Bucket

Diminishing returns means that the more you increase your ad spend the worse your efficiency will be. You use up the ‘low hanging fruit’, the part of the audience that’s cheapest to reach and most likely to buy, and average cost per acquisition or return on investment declines. There’s a lot of optimization to be done with creative testing, landing page design, and onboarding flows, but eventually you run out of big wins. When you can no longer afford to increase your spend in direct response channels without becoming unprofitable, is exactly the time when it makes sense to expand out to delayed response channels. This can be measured using marketing mix modeling, or estimated with a simple linear regression.

The Delayed Response Bucket

Mid funnel channels will have a halo-effect on your direct response campaigns, bringing some people into the market that otherwise wouldn’t have otherwise been in the market. You can think of this as increasing the size of the first bucket. Increased brand awareness will make people more likely to click on your ads, making your direct response perform better. Eventually you’ll reach a new equilibrium where you hit a new ceiling with lower funnel, and your mid funnel campaigns are starting to suffer from ‘ad fatigue’, i.e. people are getting annoyed at seeing the same ads over and over again.

The Branding Bucket

Investing in branding can be a sizable commitment, but it won’t feel as big when you’re already spending millions of dollars on lower and mid funnel campaigns. You’ll already have an idea of what resonates with your audience through creative testing, and can carry over some of those learnings into the creative process for your brand campaign. Furthermore, given that you’ve tapped out your lower and mid funnel channels, and have a well optimized conversion flow, you’re all set up to maximize return from filling up the top of the funnel. All long term campaigns also cause some short term spike in performance, and if you can approach break even on that, the rest of the long term effect is pure profit.

Measuring the Impact of Long Term Campaigns

One thing I’ve heard from the team at Measured is how consistently companies under invest in upper funnel campaigns. They say it’s one of the main findings they tend to see with new clients, and in some cases they’ve had double digit growth simply from reallocating some spend from lower to mid and upper funnel. The default attribution model for most analytics and ad platforms is last touch, and that will always give too much credit to lower funnel channels.

Often the only way to understand the true performance of your campaigns is to run a controlled experiment. For example, Measured can randomly assign a handful of geographic regions to have advertising switched off for a period of time, in order to calculate the true incremental impact of your campaigns. You have to ensure the test runs for long enough to capture the longer term impact, but that’s something the Measured team can help you build up after banking the quick wins of establishing short and mid term incrementality.