In Search of the Optimal Digital Marketing Investment Mix

Background

According to the Internet Advertising Bureau, spending on digital advertising in the U.S. has increased five-fold over the past decade, to more than $22 billion in 2009. While the internet’s role in both personal and business-related activities has exploded during this period, companies have been scrambling to integrate digital techniques into their marketing operations. And there seems to be no end in sight: to wit, online advertising during Q3 2010 registered its largest volume ever. And this dollar figures only includes web advertising – it doesn’t take into account spending on digital infrastructure development, maintenance and ongoing optimization efforts.

Levels of digital marketing investments vary considerably across industry. At web-centric organizations, this line item can chew up more than 90% of marketing expenditures, while some sectors – such as professional services – may only allocate a sliver of budgets to digital programs.

At the end of the day, there are no absolute rules that govern the digital investment mix, both for the marketing category as a whole (i.e., what percentage of budget should go to digital) and, more specifically, in the turbulent interactive marketing space itself (i.e., how to allocate scarce dollars among digital tactics). Myriad variables should be considered during digital marketing planning activities, but there are two primary inputs that should unquestionably inform the process: corporate marketing strategy, and competitor behavior. 

Start at the Top

While it may seem obvious, it’s worth addressing that no functional strategy should be defined without factoring in corporate strategic goals, and marketing is no different. To that end, the following questions need to be addressed at the outset of digital marketing planning sessions:

  • What are the organization’s most critical goals next year – new customer acquisition, new product launches, and/or operational excellence?
  • Which of the following best describes the company’s short-term goals: growth, profit-taking, or defending against the competition? Is the organization (or unit) in offensive or defensive mode?
  • What longer term strategies need to be top-of-mind with the planning team (e.g., resource availability, strength of vendor relationships, acquisition activity)?  
  • Has the overall marketing and/or digital marketing budget already been established, or will corporate strategy and competitor behavior inform the planning exercise? 

The following exhibit presents the main components of the evaluation and decision-making process:

Defining The Role of Digital Marketing in the Organization

While the digital channel is gaining importance in most organizations, regardless of industry sector, that doesn’t mean web marketing is an all-purpose tool. So, after a planning team has established definition around corporate and marketing strategy, it’s time to address digital marketing plans and tactics.

  • At a high level, what is the role of digital marketing in the industry sector? This varies considerably between B2C and B2B, and within industry niches; software companies employ digital marketing much differently than a retail company, for example.
  • Which marketing jobs is digital best suited to address, as opposed to offline marketing or even sales tactics? At a retail company, digital might be able to provide the backbone for the entire marketing and sales process for a particular demographic, whereas it would be limited to awareness building and prospect education at a B2B software company.
  • How should the digital marketing strategy balance short-term and long-term needs? Nurturing long-term customer relationships is critical for all organizations, and digital marketing can play an important role through tactics such as email newsletters and communities. Short-term marketing needs are typically addressed through tools such as search marketing and display advertising (though organic search marketing is a longer-term endeavor).
  • How will the activities be measured and evaluated? There is no shortage of data or analytical solutions in the interactive marketing industry, as measurement is arguably the sector’s primary appeal. But the amount of internal and external data available for analysis can be overwhelming, so key performance indicators need to be established to monitor performance and inform future strategies.

Step Back & Review: Auditing Digital Operations Expenditures

Marketing planning at any established company (i.e., non-startup) is rarely a blank-slate exercise. It typically begins with a review of the prior year’s activities – a marketing audit (for more information, see the ECC digital marketing audit checklist) – which effectively serves as a starting point for discussions. Marketing operations at any organization that’s been around for more than five years are usually comprised of a patchwork of loosely integrated activities, and the auditing process can be tricky as a result.   

But, it’s the nature of the beast. It’s also one of the biggest reasons that companies struggle to make dollars available for more effective digital tactics when decisions need to be made – old habits are hard to break, sacred cows are powerful and often times crippling, and change can be near impossible at some organizations. In the absence of a quantitative baseline that illustrates how much is being spent, where, and providing what return, the loudest voice at the table can usually successfully protect his turf.

An effective first step in thinking about digital marketing investments is to review your organization’s current spending patterns, competitor investments (industry averages will suffice when specific data isn’t readily available), and those of best practice organizations (regardless of industry). One basic method for thinking about digital marketing investments is infrastructure versus advertising – spending on digital marketing staff and software versus digital media and agency activity.

So, the digital operation spending mix at a typical, $250 million B2B company – the fictional “Acme Corporation” – might look as follows

DigOpsPieChart2.PNG

Taking the exercise a step further, a comparative view of this fictitious company’s spending versus industry averages might yield the following:

DigOpsComparisonView2.PNG

Implications

Modeling baseline spending behavior of your company’s digital operations versus industry averages is rather straightforward; taking the next step to define implications is trickier but also where the exercise becomes most useful and even illuminating.

In this scenario, an analysis of the digital advertising line item yields meaningful takeaways. If Acme Corporation allocates $800,000 to digital advertising, and its average cost per click in is $2.50, this translates to 320,000 visitors to the digital property (website, microsite, etc.) over the course of a year. By comparison, if Acme’s primary competitor set allocates $1,400,000 to digital advertising and attracts 560,000 site visitors during the same year, it stands to reason that the increased exposure – holding all other factors such as value proposition, pricing, etc. equal - would translate to significant competitive advantage.

Taking it a step further to quantify this advantage, if the “conversion” average in the industry sector is, say, 2%, the impact is as follows:

  • Acme:                    320,000 visitors / 6,400 conversions
  • Competition:         560,000 visitors / 11,200 conversions

Conversions are often company-specific, but, using a B2B software company as an example, conversions tend to be defined as actions such as downloading a white paper, requesting a demo, or signing up for a webinar; that is, the act of identifying a new prospect. So, in this instance, the relative increase in digital advertising has translated to the generation of 4,800 additional prospects. If a typical company’s prospect-to-conversion percentage in the industry is 5%, that means the competition has added an additional 250 new customers during the calendar year. 

Taking action here to combat the competitive forces at work here might appear straightforward – just allocate more dollars to digital advertising – but it’s rarely as simple as that. Each of the tactics – SEO, social, etc. – need to be analyzed within the context of an overall program and its goals, and how the pieces work together (or not). An increase in quality leads at an attractive cost is almost always desirable, of course, but might actually result in a negative outcome over the longer-term - such as stressing the sales organization and increasing sales staff turnover, for example.  

Further, placing too much emphasis on any single operating metric – especially in the marketing function where activities are almost always interdependent – is as unwise as ignoring the data altogether. Nevertheless, once the key inputs of the planning process have been established – the corporate strategy, the expectations of digital marketing, the infrastructure (via audit), and the competitive landscape - future strategies will begin to take shape. Areas of opportunity will become visible, as will pockets of exposure; priorities and trade-offs will become increasingly apparent. 

Designing the Plan

With all of the necessary data, information, and analysis in place, it’s time to begin crafting the strategy. (Indeed, the strategy will have likely already begun to design itself.) The exercise is very much a process, and will likely involve both top-down and bottom-up consideration. The top-down approach will yield an ideal – if unrealistic (in established companies) – scenario, whereas the bottom-up approach will rely on existing activities that are already underway at the organization to likely govern decision-making. However, the final output is most often an amalgamation of the two.

It can also be helpful to break down the exercise in more manageable components by dealing with digital operations and digital advertising separately, as the two pieces often naturally reside in standalone form. However, organizational structures and accounting methods may make this overly complicated.  

The following exhibit presents an example of what a digital marketing operations plan might look like:

DigTacticsChart2.PNG

Striking the Optimal Digital Investment Mix

Strategic planning in any area of an organization is, indisputably, more art form than science. Finite resources must be allocated across tactics in an effort to yield desired outcomes that support organizational goals, both short- and long-term. So, in that respect, digital strategies are conventional.

But that’s where the comparisons between digital marketing and every other functional area of a company ends. Given the speed at which the interactive marketing landscape is evolving, digital operations and marketing plans are, by necessity, never completed - a constantly moving target. For better or worse, most digital marketing techniques are maddeningly flexible, which means competitive conditions are in a constant state of change, and this environment can render even the best-laid plans ineffective or obsolete literally overnight.

To manage this volatile environment successfully, executives and planning teams that are responsible for ensuring their organization’s success can enjoy powerful benefits from using a structured methodology to devise their digital investment strategies. Within some areas of the marketing operation, audits and competitive benchmarking offer the allure of making planning decisions virtual no-brainers. In most cases, however, it’s not that straightforward, and strategies result from a combination of analysis, insight, vision, and instinct. As digital marketing’s role in the enterprise continues to expand in the coming years, organization success is going to be inextricably linked to sound digital strategy.

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FURTHER READING

Auditing Digital Marketing (Part III): Vendor Management 

Using An Audit to Inform Digital Strategy

• Digital Strategy & Planning: Defining The Interactive Vision

Making the Case for a Marketing Audit

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About East Coast Catalyst

East Coast Catalyst is an digital strategy consulting firm that works with clients to develop innovative web strategies that drive new business and competitive advantage. Relying on a research-driven methodology to analyze performance and inform effective strategies – and an objective corporate structure devoid of conflict of interest concerns – East Coast Catalyst helps clients sell more products and services, capitalize on new opportunities, create sustainable advantage in evolving markets, and transform their businesses.

For more information, contact Tim Bourgeois at tbourgeois@eastcoastcatalyst.com or 617-314-6400.