September 8, 2021

Why having an Ecommerce marketing budget is a really really really bad idea

Dr Peter Mowforth

Background

Ecommerce should be about making sales, maximising profit and getting rich. It’s all about making money. While many businesses have achieved this through ecommerce, an unfortunate number have not. Why so?

I was recently asked “What’s the single top mistake that business owners frequently and repeatedly make that stops them from maximising their wealth”. While there are clearly multiple answers, the one I gave provides the basis for the post.

For 26 years INDEZ has been working with a large portfolio of businesses of all types and sizes. While every business is different, common issues arise that frustrate us and act as hand brakes on the size, scale and profitability of ecommerce companies. Importantly, once the key people in a business understand the issue it can be quickly and easily fixed.

The business owner’s dilemma

The two tenets of business that are central to growing any organisation are to make profit and to keep costs down.

Any ecommerce business owner has a degree of control around making profit. They can do this by choosing a good niche area and then developing a good strategy that will make their products sell with as much profit as possible to as many customers (and repeat customers) as possible. A key point is that control is only partial because you don’t have control over what your competitors do.

While making profit can only be partially controlled, keeping costs down can be completely controlled. If profits are down a bit then a business owner can be tempted to squeeze their costs in order to balance the books. The primary mechanism here is by setting budgets.

Throttling the Golden Geese

In the world of ‘ecommerce-done-right’, decision making is based on data. Profit is always the ultimate KPI for the business (not sales or turnover). This means that if the business has one channel of it’s operation that makes profit (e.g. a particular adwords campaign, an offer sent via a newsletter, an affiliate marketing deal, an specific SEO ranking result, etc, etc) then why would you limit spend on that channel? Provided the business has sufficient stock to sell and has the necessary cash flow to bridge the gap between the marketing cost and the realisation of the resulting revenue then reducing the spend simply reduces your profit. Put simply, if you have a machine that generates £2 every time you put £1 into it then why would you ever stop putting money into it by applying a budget?

An Explanation

Busines owners are not stupid. Often, far from it. If we consider the “£2 for every £1 machine” then one explanation for not maximising its use would be because you were not able to clearly measure and see the machine's performance. If the “£2 for every £1 machine” was with a group of other machines that only generated 50p for every £1 that was put in then it’s profitable performance could be obscured.

In our experience, it is the accurate measurement and communication of performance of every part of the system that leads to ecommerce success. All too often, business owners will simply look at Ecommerce as a whole and then make decisions as a whole. The business decision making has been oversimplified and key opportunities lost.

You might want to try a reality check by answering the following questions:

  1. Do you know all your individual costs (e.g. the buy-at prices for your products) precisely?
  2. Does the business let those doing the ecommerce marketing know those precise costs?
  3. Does the Ecommerce Marketeer know the exact costs for every part of marketing spend?
  4. Does the Ecommerce Marketeer have a way to quickly and easily see exactly how each marketing channel/campaign is performing (in terms of profit) relative to each other?
  5. Is all of the above easily and frequently made available to and correctly understood by whoever has the job of setting budgets?

My guess is that most ecommerce companies will score either zero or 1. A very few will score 2 and I would put money on there being no ecommerce company scoring 5 out of 5.

How to Fix it

It’s rather obvious that a unified real-time dashboard is a key first step. This means something that is able to integrate Google Analytics with your ecommerce platform, social media and mailing platforms as well as accounts and, possibly, supply chain and fulfilment data. One example can be seen here. Not everything needs to be in the dashboard at the start. As long as the “£2 for every £1 machine” is in the dashboard then visibility of its performance means that it won’t get turned off as part of a budget cap.

Once a comprehensive dashboard is in place, it needs to be frequently visited, used and understood by all the key individuals in the business.

Only when all this is in place is it truly possible to move towards fully optimising the profit in the business. The dashboard will be able to show exactly where profits are being generated and where losses are being made. This means that marketing spend can be directly aligned with those activities that make profit and the dashboard will make explicit how that profit is being generated. At this point, everyone involved will understand that throttling profitable activities through the application of a fixed budget is plain daft. The final result is that spending then becomes a formula rather than a budget.

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