Thursday, April 30, 2009

Performance Insider: The Margin Of Error

The Margin Of Error

One of the aspects of online marketing that makes it so fantastically alluring to even the most frugal of e-commerce advertisers is its, shall we say, accountability. Any serious online marketer can tell you what your "return" was on that $1,000 you spent in online advertising yesterday, usually calculated as an A/S Ratio percentage. This is partially what makes online marketing such an attractive recessionary marketing channel for advertisers in many different verticals. And while this accountability of a dollar-spent-to-dollar-gained ratio certainly makes online advertising the Rocky Balboa of the marketing channel boxing ring, a simple A/S Ratio calculation can often be dangerously misleading.

As we all know, different products have different margins. However, many times these varying products are managed to the same overall A/S Ratio. Despite being an integral part of the financial dealings and decision-making on the client side, product margins are often overlooked in the management of e-commerce campaigns. In a very simplified example, suppose one of my e-commerce clients sells furniture. I have sofas in one campaign and coffee tables in another. My client collects a 15% margin on sofas and a 10% margin on coffee tables. Even though I may record and watch an A/S Ratio for each campaign, my overall goal that everyone is paying attention to is a singular A/S Ratio. Sometimes we call it a "blended" A/S Ratio. So here I go, dolling out my $1,000 online while shooting for a 10% account A/S Ratio ($10,000 in furniture revenue). We pay attention to seasonality, news flashes, current trends, offline marketing influences, promotional offers from the client and the list goes on. What we often fail to consider are margins, which can drastically affect the true profitability of a campaign. Granted, there are other factors that impact profitability such as freight costs, etc.; however, margin is an imperative and essential, but often disregarded consideration.

For a true profitability reading, it's a good idea to look at your optimization efforts on the category level. To wrap up the simple furniture example, you may want to give yourself a bit more leeway in your sofa A/S Ratio as you net a higher profit/sofa than you do on your slimmer-margin coffee tables. Taking product margins into account may not always be simple, but, at the end of the day, it will always enhance your ability to put more net dollars into your clients' pockets.

One of the traditional drawbacks to applying margin analysis to campaign-level optimization is that the converting keyword or display ad doesn't always match the cart contents. There is an often-faulty assumption that consumers converting on the term "sofas," or on the sofas display ad, are actually buying a sofa. On the contrary, it would not be uncommon for a consumer to enter my client's furniture site through my sofas display ad, shop around, and then decide to purchase the coffee table on sale instead. At the end of the day, I have one conversion for the sofas ad, yet I'm actually packaging up a lower-margin coffee table to be shipped to the consumer. Due to the frequency of this occurrence, applying margin data to my decision-making without knowledge of the relationship between the ad and the cart contents would make less sense. I would, in essence, be applying margin data to the advertisement, which doesn't help the client one bit when arriving at the bottom line.

A more advanced solution to tackle this objection would be to request that your client pass the cart contents for each conversion, as well as the margin per order. Draw up relational percentages by campaign from sample data, and make a relationship assessment between the cart contents and the ad/keyword attributed with the conversion. For example, in 1,000 conversions for the word "sofas," you see in your conversion data that people bought sofas 870 times (87%) of the time. While these percentages will almost never depict a perfect connection, they can be of assistance when applying margin analysis to your advertising budget management. Armed with this data, I may now be more comfortable with a higher than normal A/S Ratio, because (1) I know that most people querying sofa-related keywords are buying sofas, and (2) I know I'm making a higher margin compared with other products like coffeetables. Once these percentages have been established, begin using your margin per order as an actionable piece of data to increase overall profitability and be sure to revisit your percentages frequently.

Below are some thoughts to keep in mind when you and your clients consider product margins for increased profitable optimization:

1. Encourage your clients to be open about sharing margin data (this could be a whole article in and of itself). This can sometimes be a hard sell, but if the profitability sword is wielded intelligently, you'll be in good shape. Simple A/S Ratio optimization just doesn't cut it.

2. Be willing to adjust campaign level A/S Ratio goals depending on the margins of the products in that campaign.

3. Be smart about your organizational structure for ecommerce campaigns. Strategically organize your campaigns so that margin can be not only considered, but utilized as a vital data point. Systematically organize your items into groups with other like-margin items.

While the furniture scenario may be too simple to cover all aspects and views on the validity and viability of utilizing margin data, the fact remains that this piece of information simply cannot be swept under the rug. Keep in mind that margin is also just the tip of the iceberg, as things like Life Time Value, Branding, and New vs. Existing Customer percentages by category are also sophisticated, but valuable considerations. As normal, and traditionally accepted, as an A/S Ratio may be, the "margin of error" in its exclusive use is just too wide to overlook.

Luke Perrie is a search supervisor at SendTec, a multichannel direct marketing agency that specializes in search engine marketing and direct response television.

Performance Insider for Thursday, April 30, 2009:

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