August marks the halfway point of the retail fiscal year and when marketing really starts moving from planning to execution mode. This year, more than ever before, the marketers who focus their budgets on optimizing to their incremental margin will have a more efficient program that opens up more spend for acquisition marketing.
Awareness and prospecting campaigns are essential to growth. However, budgets spent on acquisition marketing can be difficult to tie directly to purchase, which can make financial teams wary of handing over more budget for top-of-funnel programs. Marketers have two levers to pull to overcome this hurdle, which, when operated in tandem, can help them build a self-funding flywheel for driving incremental customer growth.
First, marketers need to lean into more accurate ways to measure incremental revenue and move away from inaccurate proxy metrics like clicks and last-touch attribution.
Second, by ensuring that marketing to current customers is hyper-efficient, marketers can shift some of their own budgets up to acquisition strategies.
With the right insights and allocation strategy, they can much more effectively measure the impact of their spend at the top (and bottom) of the funnel, minimize waste, and demonstrate the value of their investments to their finance team.
As one example, a retailer I worked with recently had a “lightbulb” moment that proved they needed new metrics to understand the value of advertising in different parts of the funnel. They received 20,000 orders from a top-of-funnel Facebook campaign that went viral, even though it only got 5,000 clicks. Measuring exposure and attributing media spend to a conversion event, even when there isn’t a click on an ad, requires more sophisticated measurement, but without it, all sorts of incorrect assumptions would have muddied their plan.
What is a Self-Funded Flywheel?
A marketing flywheel based on incrementality is a beautiful thing.
This focus on retained customers increases revenue and creates higher margins, which can be used to spend on marketing to acquire new customers, who in turn become retained customers - and thus, the flywheel continues, building a bigger and bigger base of valuable retained customers, spinning off more money to spend on acquisition.
Setting Up the Flywheel
The first steps in creating a marketing flywheel is for marketers to establish a baseline measurement of a few key metrics, starting with marginal lifetime customer value. Marginal lifetime customer value is the revenue gained by a customer minus all costs, such as cost of goods, media, and shipping, as well as marketing costs. With this number, marketers have what they need to compare the revenue and cost per sale for retained customers against those for newly acquired customers as fairly as possible.
The next step is to separate media spend for acquisition and retention efforts and start measuring incrementality using carefully created holdout tests. These tests are essential to getting a clear understanding of the true impact of spend on conversions. The goal of this process is to stop wasting marketing spend on people who don’t need to be exposed to certain messages and start targeting marketing spend on the right audiences in the right channels.
Lastly, to get a true picture of the value of marketing activity, marketers need to suppress exposure. For example, suppressing current customers from advertising campaigns when they can be reached through less costly owned channels.
Should You Work with a Measurement Specialist?
If marketers don’t have the expertise internally, working with a measurement specialist can help deploy accurate tests that drive the ongoing flywheel process, including:
- Holdout tests expose the true value of brand awareness spend, e.g., the baseline level of sales in the absence of media, and reveal the true value of acquisition media spend
- Scale tests to identify the diminishing returns of every channel
- Cross-channel incrementality reporting measures the ongoing incremental sales from all channels and each section of the funnel, demonstrating performance to the finance team in a language they understand.
Tests like these provide evidence of where spend is truly incremental to the business, helping marketers reallocate less incremental spend to other areas. It’s not uncommon for these test results to surprise you, forcing you to rethink your marketing plan.
The New ROI Conversation
With these processes in place, marketers will start to measure “real” ROI.
As they say, with knowledge comes power.
It will become clear exactly how much return comes from marketing to net new customers or how much a holiday campaign yielded in incremental spend from loyal customers.
One retailer I worked with realized that the people who clicked on their discount campaigns the most were in fact the most likely group to have purchased without the offer and were actually causing the campaign to be much less profitable. With incremental measurement in place, they were able to suppress offers to that group and deliver higher ROI.
Marketers have been squeezed for budget lately, and part of the problem is in the inability to prove results across an increasingly diverse media mix. An incremental marketing flywheel solves that problem and creates a completely different conversation between the CMO and CFO.
When marketers can show exactly how marketing spend drives different actions - and delivers profit - CFOs will be looking for more money to hand over. Come holiday season, it’s better to be aligned with a flywheel than simply throwing money at new customer acquisition without any way to know if it will pay off.
Interested in elevating your media strategy? Download our geo-testing guide today to see how geo-matched market testing can help lead your brand understand the true impact of your ad dollars, eliminate needless spend, and even build a self-funded marketing flywheel.