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Business Marketing

Beware the Zuckerbook money-doubling machine: spotting a bad ad spend

Promises of doubling your money with Facebook ads is actually a pretty bad bet: why the “breaking even” promise of an ad cost is garbage.

facebook money

facebook money

A Not So Great Pitch

Not too long ago, I saw an ad for Facebook advertising. The ad featured a local small business. I forget the exact numbers and business name, although it was something along the lines of “Mary’s Cookies uses Facebook advertising. Recently she invested $2,200 in ads and received over $4,500 in sales!”

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When I play blackjack in Vegas, I am happy if I double my money. If a stock I own doubles in value in a year or two, again, nothing but smiles. But, if my business only returns two times what I put into marketing it, I will be crying in my beer. Perhaps a solopreneur with no other overhead can afford marketing expense approaching 50% of sales, but there aren’t a whole lot of other companies that can survive, let alone thrive, if burdened to that extent. How about your company?

Know Your Key Operating Metrics

A lot of companies that I consult for don’t initially know and understand their key metrics. I get it – they are busy doing stuff, and analyzing numbers falls in the category of things to do that are important but not urgent. However, it is one of the first things we straighten out, because it is not simply important for a business owner to know her key operating metrics, it is mission critical. Marketing as a percentage of sales is one of those key metrics.

Business owners must be vigilant in measuring all of their marketing initiatives so that their calculations are as accurate as possible. I can attest that it is easy to think things are going well, simply because the cash register is ringing, while not recognizing that you have a broken business model due to the cost of acquiring customers being far out of whack with their expected lifetime value.

It happens, so measure and manage.

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Wildly Varying Marketing Expense

Marketing and advertising expense as a percentage of sales varies considerably by industry, and even among companies within the same industry. Some mature companies spend aggressively to maintain their brand, while others spend very little after they “arrive” and choose to just, in the words of Seth Godin, “milk the cow.”

Companies knocking the cover off the ball may spend liberally because the money is flowing, while one of the first things struggling companies cut is discretionary marketing spending (an executive decision so foolish and so common that I always think of lemmings rushing toward the cliff when the announcements start rolling out during tough economic times).

A 2014 survey published by the American Marketing Association and Duke University found that companies with less than $25 million in annual revenue (sales) spent an average of 11% of their revenue on marketing. Companies with greater than $25 million in annual revenue spent only 9%. The same study found that business to consumer (B2C) product companies spent on average 16.3% of their annual revenue on marketing, outpacing B2C service businesses, which came in at 10.9%. Business to business product and service businesses checked in at 10.6% and 10.1%, respectively.

The Occasional Outliers

9%, 10%, 11%, 16%, but not 50%! Granted, there are some high-flying technology companies that spend an enormous portion of their sales on marketing and advertising. Salesforce.com and Twitter are among them, spending 53% and 44%, respectively, in 2014.

Both companies are essentially still in land grab territory, spending aggressively to capture relatively new markets. Salesforce.com has a product that, once installed, carries significant switching costs. I suspect the average lifetime value of their customers is sky high.

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We didn’t talk about that with Mary’s Cookies.

Perhaps the $4,500 in sales represents a lot of new customers that will stick with the company for a long time and generate plenty of additional sales. In that case, solely looking at the marketing spend relative to the immediate uplift in sales doesn’t do the advertising investment justice.

Twitter is presumably spending big to build out their network, which is understandable – more participants in a network equals greater network effects, i.e., an overall enhanced user experience. Although 44% still strikes me as high for Twitter, I’ll give them the benefit of the doubt.

Still, these are extreme outliers. 10% is a much safer percentage to apply to any business USA selected in a vacuum. And, no offense to Mary, but it’s hard to conceive of her cookie company carrying the high gross margins and high switching costs enjoyed by the software as a service industry.

Another Questionable Pitch

Over the years, I have bought a lot of advertising – radio, billboard, magazine, newspaper, banner ads, AdWords … you name it, I have probably tried it. Okay, that’s not true. I have yet to name a stadium, burn my message in the air with a sky writer, pay someone to tattoo my company name on her forehead… But, I have thrown a lot at the advertising wall over the years, just trying to see what works.

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If you’ve also been foolish enough to buy a lot of traditional advertising (which I define as old, boring print advertising that rarely works any longer), no doubt you have heard a favorite closing line of their ad sales people. They ask for your company’s average sale price and then compare it to the cost of the ad buy. They love to be able to say, “You only have to make one sale to break even!”

No joke, I have heard this line no less than 50 times over the years. Breaking even is always pitched as a positive. And, that is one way to look at it – after all, it is better than losing money. Another way to look at the break even outcome is that if you consistently offset 100% of your sales with marketing expenses you are going to have a lot of free time soon ‘cause either your business ain’t gonna make it, or you won’t be in charge of its marketing and sales efforts. The goal is to do a tad better than “break even” with your marketing budget!

Okay, Maybe this Zuckerbook Money Machine Thing is Worth a Spin

Always anxious to play the optimistic fool role and throw more stuff at the advertising wall, I was not deterred by the unimpressive Mary’s Cookies case study.

One of my companies is experimenting with Facebook ads right now. Our target marketing expense in the company is, believe it or not, 10% of our sales. This is a new company and we aren’t certain exactly what our target ideally ought to be. So, we are defaulting to that safe moving target of 10%. We are not going to blow our budget Twitter-style.

At the same time, we want to be careful not to spend too little and find out when it is too late that we haven’t built the sales funnel we projected. Our early results are actually very encouraging. Who knows, if we hit our target with Facebook ads, you may soon see our company featured in a Facebook ads case study. Sorry, Mary’s Cookies. You had your undeserved run.

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Try Stuff and Measure, Measure, Measure!

Or, this would be a good time for Mary to say good riddance to the Zuckerbook money-doubling machine. She should throw some other things at the advertising wall in an effort to find an approach that works, marketing initiatives that throttle her sales engine, along with an acceptable customer acquisition cost. AdWords, billboards, naming stadiums … The same advice applies to your business – don’t be afraid to try different marketing initiatives.

Be vigilant and measure the results. Learn and understand your metrics. Discover what works and press the pedal. If that happens to be the Zuckerbook money machine, have it. Just don’t ask to be the feature of their next case study. I called dibs. But, hey, I hear Subway is looking for a spokesperson.

#AdBudgeting

Written By

Brett is The Startup Shepherd – part startup consultant, part angel investor/financier, and part business lawyer. A six-time entrepreneur and recovering “left brainer,” Brett particularly enjoys helping startups and rapidly growing socially-conscious companies.

1 Comment

1 Comment

  1. Justin Callaway

    September 18, 2015 at 4:53 pm

    I’m having a much different experience. With very minimal ad expense and very high return. I’m spending $3 per $50 sale. Once profit is driven, I gain about $30. So roughly 10% with no actual cost or work that I have to put into it. My worry is… I’m spending $100/day with this method. If I were to invest $200/day would my earnings double? Or would they tank? It’s a tricky shark.

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