Most marketers won’t be sorry to say good-bye to 2020, as the coronavirus pandemic wreaked havoc on retail revenue, profitability and ad budgets.
Consumer buying habits have shifted, perhaps permanently, and marketing strategies have had to evolve as well.
According to McKinsey, three quarters of consumers have changed brands, shopping methods or places to shop since the pandemic began last spring. That can be a golden opportunity or a death knell for retailers.
Paid ad spend is already on the rebound, but are retailers being smarter about 2021 biddable media budgeting decisions?
Rather than continue to rely on efficient but short-sighted KPIs like Return on Ad Spend (ROAS), we recommend starting off the New Year by investing in forward-looking best practices, namely new customer acquisition, incrementality testing, and customer lifetime value (CLV), to create long-term, sustainable business success.
Recommendation #1: Focus on new customer acquisition—not customer retention
Of course, keeping hold of existing customers is important, but new customers drive growth. And while it may cost more to attract them, new customers offer more potential than existing ones.
New customers generate more profit than existing customers. They are more likely to return after making their first purchase, and other less expensive, organic marketing campaigns can do the heavy lifting once they are in the fold.
Unlike efficient-friendly brand terms or RLSAs, marketers can snag new customers using upper-funnel channels.
The rewards of acquiring a new customer include a higher conversion value, because we expect them to make repeat purchases. Their value reflects a portion of those expected buys, otherwise known as “lifetime value” (more about that in Recommendation #2.)
Retailers can incentivize bidding systems to bid higher for new customers – even if their first transaction falls below your average ROAS target – because the payoff comes later in the relationship.
In addition, because you are now using lower cost retention marketing channels, their repeat purchases will be complemented by lower organic marketing costs.
New customers tend to generate more revenue than existing customers, which is why smarter retailers optimize for lifetime value, rather than ROAS.
This entails adding the profit made over a customer’s lifetime (typically 12 months) to the profit of their first purchase.
Retailers that focus on ROAS may be more efficient in the short-term, but they sacrifice future expansion.
Shifting your business focus toward new customers and higher profitability requires two things. The adoption of long-term performance advertising measurements across the enterprise; and an organizational willingness to sacrifice short term efficiency in exchange for future gains.
Recommendation #2: Learn To Optimize For Customer Lifetime Value
Retailers have relied on ROAS as their go-to metric for a long time. In fact, ROAS is still the most popular KPI, according to Crealytics’ The State of Performance Advertising KPIs: 2020.
Advanced paid media bidding systems do a great job of hitting efficiency or revenue-based KPIs, but this strategy often conflicts with long-term profit goals.
The smartest retailers out there have already reached this conclusion.
Now, thanks to a seismic shift in how to succeed in performance advertising, customer lifetime value (CLV) has become the gold standard for evaluating a campaign’s real impact.
CLV is the total amount of revenue a company can expect to earn from one customer over the course of their engagement with the retailer their “lifetime,” minus costs for acquisition, logistics and returns.
It measures how changes in customer behavior can influence their future profits or their profitability to the company.
As such, it is a key measure of not just the efficacy of your performance initiatives, but also how well the company is doing financially – not just in the present, but also in the future.
Understanding CLV isn’t the same as incorporating it into your paid media campaigns.
Whether down to challenges caused by data availability, organizational roadblocks or the next quarter’s revenue goals, many retailers still opt for more traditional, short-term metrics (i.e. ROAS).
Most automated bidding solutions optimize towards a fixed ROAS efficiency target, prioritizing efficiency across products, geographies or defined segments.
To drive as much revenue as possible, they try to display a similar ROAS, regardless of differences in markets or audiences.
But when your bidding system chases down the cheapest available revenue, it comes from the revenue sources you don’t necessarily want: existing customers, low margin products, and high return rates.
However, when you factor in repeat purchases accrued over time, such as when tracking a new customer’s behavior for a full year, you can determine the additional revenue generated beyond their first purchase.
Accounting for margins and returns further changes the game. What seems balanced when viewed through a ROAS lens breaks down completely once you measure for long-term profitability.
Learning to use CLV leads to two important questions: How much is the average customer worth to my business? And, what percentage of value do my top customers represent?
The clues, revealed through your CRM, will better inform your biddable media strategy.
Start with a customer cohort analysis to determine your buyers’ shared characteristics. The longer the transaction history, the better the calculations.
Customer tracking also plays an important role when optimizing for CLV.
Most retailers’ bidding systems still ingest revenue figure, but making CLV actionable requires you to feed them the margins of products sold (excluding order-related costs like shipping and packaging).
You should also know whether the buyer is a new or existing customer; new customers should be assigned additional value in line with the results from your cohort analysis.
By ingesting these data points into your biddable media, you will set yourself up to make smarter decisions and reallocate budget to high value, new customers.
Recommendation #3: Inform Your Attribution Systems with Incrementality Testing
To develop a clear view of customers’ lifetime value, retailers need to understand the varied touchpoints that impact a purchase decision.
If you’re like most retailers, you look to your multi-touch attribution (MTA) systems to guide your thinking.
But assigning touchpoints is only half of the story — the other half is understanding the incremental contribution of each media tactic. What is the incremental lift that each channel can create for your business?
Knowing your ads’ incremental value can bulletproof your budgets. You will allocate better, waste fewer dollars, and create long-term, cross-channel success.
Incremental revenue differs from attributed revenue in that it is a direct result of the ad spend invested in a marketing channel or audience.
Attributed revenue represents revenue from shoppers who would have converted anyway. You can express it in the following ratio:
Incrementality = Revenue Caused by Channel / Revenue Attributed to Channel.
There are some challenges. Incrementality testing is an advanced, multi-faceted concept. Performance advertisers we surveyed said siloed data, budget limitations, and a perceived lack of IT resources are all obstacles to measuring incremental value.
Ad budgets typically flow to channels and audiences with the highest ROAS. But incrementality has an inverse relationship to conversions.
When you know the incrementality of a channel or audience, you can adjust its ROAS attribution accordingly. In other words, Incremental ROAS = Attributed ROAS x Incrementality.
In an ideal world, marketers would use random controlled experiments to assess incrementality.
Unlike treatment groups, control groups would see no ads, enabling marketers to compare all channel revenue between the two groups. The resulting incremental value would then be applied to the channel’s attributed ROAS.
Such tests prove harder in practice, however.
Some ad platforms restrict the chance to selectively market to two random user groups. Also, the ability to follow these users (and their transactions) through other channels can be limited, due to things like inconsistent tagging.
Incrementality testing can reveal some hard truths.
Even if the reporting shows encouraging numbers, a business might struggle to meet its financial goals. Why is that? Because ROAS performs best in areas with low incremental value — brand or retargeting campaigns, for example.
These second-class revenue sources ignore the things that matter, like high-margin products and new customers.
Are You Ready for Long-Term Success?
Being in it for the long-haul isn’t for the faint-hearted. The questions to ask yourself include:
Can we stomach allocating budget towards areas that aren’t as efficient in exchange for greater long-term gains?
Are we willing to sacrifice short term and unsustainable revenue in return for longer-term profitability and a healthier customer portfolio?
We think the answer should be a resounding “yes.”
Advertisers who focus on long-term revenue goals make about five percent more revenue in the first 12 months, and can triple that number when they look over a longer time horizon.
It doesn’t matter how big (or small) your organization is. In a hyper-competitive environment, optimizing for long-term metrics like CLV will help you hold your ground against giants like Amazon.
If you’re a forward-thinking retailer, the chances are you’ve already started making some of the strategic changes referenced above. Best practices move quickly in digital marketing.
But pay attention to these two questions and you’ll find your ad budgets work harder next year. They certainly won’t be wasted.
Want to kickstart your biddable media campaigns in 2021? Drop us a line for honest, expert advice on enhancing your company’s multi-channel marketing strategy