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The Formula That Will Help You Decide If You’re Wasting Your Money Online

Is your contribution ratio margin above 3X? If it’s not, your business is most likely not going to survive.

Jacob Baadsgaard

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In 2014, a viral video depicted a scene that would have been hilarious, if it hadn’t been so sobering. It started with bystanders attempting to save a winter sledder, who had broken through the ice of a California lake. The rescue was so badly botched, that in the end, 11 more people had to be pulled from the freezing water.

Have you ever seen this kind of thing happen to a business? I have.

If you’re like many businesses, you may feel like you are constantly treading water in a freezing lake. You’re just a few moments from going under, but there’s hope. All you have to do is get a solid online marketing campaign up and your business will be saved, right?

Online marketing certainly has the potential to save your company, but if you invest in the wrong channel, your marketing spend will be less like a life jacket and more like a cannon on your bootstraps. But unlike sledders swimming in an icy lake, many companies can’t tell whether their marketing efforts are pulling them to shore or pulling them under.

Related: 7 Creative Strategies For Marketing Your Start-up On A Tight Budget

Fortunately, if you’re wondering whether or not a particular marketing channel is helping or hurting your business, I’ve got three words for you: Contribution margin ratio.

Crunch the numbers

Ok, I’ll admit those are probably not the three sexiest words I’ve ever strung together. They’re accounting words, and it’s unlikely that you were drawn to business by the glowing prospect of crunching numbers. But what if I told you a little number crunching could save your business? Trust me, it could.

Luckily, the equation for calculating contribution margin is a cinch.

In accounting terms, contribution margin ratio (CMR) equals sales divided by variable costs. In plainer language, it’s what you made from sales divided by how much you spent on marketing and fulfillment.

Calculating Contribution Margin Ratio

Essentially, variable costs are company expenses that increase as sales increase. There are certain costs that come with fulfilling a sale – things like manufacturing, packaging and shipping. These are your variable costs.

On the other hand, as you spend more on marketing, the more sales you make, at least theoretically.

Unfortunately, if your marketing stinks, then you won’t generate enough revenue from sales to make the investment worthwhile. So how do you know whether a particular marketing channel is helping or hurting your business? Well, let’s calculate a CMR for your marketing.

Marketing Contribution Margin Ratio

Marketing-Contribution-Margin-Ratio

So, if you spend $1,000 on marketing, and make $500 in sales, your marketing CMR is 0.5. If you spend $1,000 and make $10,000, your CMR is 10.

Obviously, bigger is better, but how big is big enough?

In my experience, a CMR of three is enough to break even. Above a three, you’re making money. Below it, you’re losing money.

Related: Target Your Market… Or Die

What does this look like in real life?

In case this is all seems a little abstract, let’s see how this works for a hypothetical business. For example, pretend you started a small business a few years back giving aerial tours of the Grand Canyon.

Your plane seats one passenger, and you charge $150 per flight. You haven’t done much marketing, but you have a steady flow of about 20 ticket sales per month from talking to people yourself (direct sales), loyal repeat customers and word-of-mouth referrals.

You’re making $3,000 a month before you factor in your expenses.

Unfortunately, each flight costs you $75 in airplane fuel, wear and tear and other flight costs. That leaves you with $1,500 in profit.

That might be a nice little business, but your costs don’t stop there. You also spend about $2,000 a month on your airstrip mortgage, office utilities and plane maintenance. We call these fixed costs because you have to pay them whether or not you’re making sales.

The long and short of it is: You’re in the hole $500 every month. Or, in other words, your business is sinking.

Now what? You don’t have the money to buy a bigger plane, and you’ll lose the customers you have if you increase your prices. However, you discover that you’re missing out on a lot of sales because most tourists plan their trips online before they travel, and you don’t have an online presence.

In an effort to get your business moving in the right direction, you decide to try online marketing – listings on travel websites, pay-per-click ads and promotional email campaigns.

The only question is, how effective does your marketing have to be to break even?

1X Contribution Margin Ratio

What if you made one $150 sale for every $150 you spent on marketing? That’s break-even, right?

Sadly, no.

Remember all those fixed and variable costs that were eating up your profit margin in the first place? If you spend as much as you make, you’ll never make any headway against your $500 deficit. Your marketing CMR may be 1X, but you end up losing money on every sale in fulfillment costs ($75, to be precise).

Take a look:

Contribution margin

Related: Choosing Which Channel To Take A Chance On

2X Contribution Margin Ratio

What about a 2X contribution margin ratio? If you spend only $75 on marketing to make a $150 sale, you’ll offset your fulfillment costs, right? That’s true, but you still won’t be making any progress against that $500 deficit in your budget from your fixed costs.

Contribution margin x2

3X Contribution Margin Ratio

But what if your marketing was even more efficient? What if you spent $50 on marketing to produce a $150 sale? At a 3X CMR, you finally start to break even as long as you can get at least 20 sales from your online marketing efforts.

Contribution margin x3

Even after you hit a 3X multiple though, it’s still slow going. Your marketing is sustainable, but you can’t really grow your business on this sort of margin. After all, you can probably only make around 40 flights in a given month, which just gets you to your break even point.

4X Contribution Margin Ratio

If you really want to make a profit on your campaigns, you need to get them to produce at least a $4 in revenue for every $1 you spend on advertising.

Contribution Margin x4

Now you’re breaking even after 14 sales. If you make 40 flights in a month, you only have to pay for marketing and fulfillment on six flights. At $37.50 of profit per flight, you make $225 per month. All of a sudden, your online marketing is starting to make a lot more sense.

5X Contribution Margin Ratio

Once you hit a 5X contribution margin, you are finally in a good position to start using your online marketing to actually grow your business. You break even at about 11 sales, which means that your last nine sales net you $405 in profit each month.

contribution margin x5

With that kind of profitability in hand, you may be able to take out a loan, and get a bigger plane, allowing you to book two to four times as many tickets. Your expenses might go up a bit, but if you can fill between 80 and 160 seats a month, you are in a good position to really start making some money.

Here’s the moral of the story

Is this whole contribution margin ratio thing starting to make sense? Good. Let’s boil all that math down into a simple rule of thumb.

  • If your marketing CMR is three or below, rethink your marketing. You’re probably losing money.
  • At a 4X CMR, your marketing is turning a profit.
  • If your marketing CMR is five or higher, you can use online marketing to grow your company.

This is how to up your marketing CMR.

By now you’re probably thinking, “Great, I want a big CMR, but in your story you just arbitrarily upped the CMR. How do I do that in real life?”

Good question. In fact, that’s a question I’ve devoted my career to answering.

The specific answer varies by business, but most companies struggle to reach a 4-5X contribution margin ratio for one reason: They spend their online marketing budget in the wrong places.

Take AdWords, for example. The average AdWords account wastes 76 percent of its budget on search terms that never produce conversions, let alone sales. So if your AdWords campaigns are running at a 3X multiple, the easiest way to get to a 5X or better multiple is to stop wasting money on the wrong keywords.

For example, we’ve had clients triple their sales by simply taking their wasted ad spend and redirecting it into more effective campaigns. As a result, these companies have grown by leaps and bounds and made millions in profit.

Can you imagine what going from a 2-3X CMR to a 6-9X CMR would do for your business?

Related: Why Savvy Social Entrepreneurs Should Use Digital Marketing For Business Growth

Find your current CMR

Calculating your marketing CMR is actually fairly easy. You just need to know the following.

  • How many sales your online marketing has produced.
  • The average customer lifetime value (LTV) of your online marketing sales (for help figuring this out, click here).
  • How much you’ve spent on online marketing.

Then it’s right back to the equation from the beginning of the post.

How to calculate marketing CMR

 

Plug the number you get into my rule of thumb, and you’ll have a good feel for how effective your marketing is.

Here’s the takeaways

Over my career, I’ve met, talked and worked with thousands of entrepreneurs and business owners. Without fail, the success or failure of these companies revolved around their CMR.

Below 3X, companies struggle and die. At 3X, they survive, but just barely. Only the companies that reach a 4X or better CMR thrive. It’s a simple rule of thumb, but an effective one.

So, if you want your online marketing efforts to keep your business afloat, they must be driving at least $3 in revenue for every dollar you spend. Otherwise, your company probably won’t survive.

This article was originally posted here on Entrepreneur.com.

Jacob is passionate entrepreneur on a mission to help businesses achieve online marketing success. As the Founder & CEO of Disruptive Advertising, Jacob has developed an award-winning, world-class organization that has helped over 2,000 businesses get the most out of their digital marketing.

Online Marketing

4 Key Social Media Mistakes You Might Be Making – And How To Avoid Them

Social media can revolutionise your brand presence, or do more harm than good, depending on your strategy and execution.

Terena Chetty

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Whether or not you’ve already embraced social media in your business, the facts can’t be denied. Not only is it the fastest growing global communication medium, but it’s completely revolutionised the way brands and consumers interact.

The problem is that for many businesses — large and small — it remains unchartered territory viewed with uncertainty and even a degree of suspicion.

SMEs in particular seem to struggle with social media. This could be due to a misunderstanding of the role that social media plays in business, underestimating the sheer power of it and not using it effectively as a business tool.

Here are four common mistakes many SME social media pages display and some of the solutions you can implement to overcome these shortfalls. Why should you care? Because social media is a relatively inexpensive way to really boost your brand presence — if it’s used effectively.

Let’s get started.

According to www.imagibrand.com:

“Social media marketing done the right way requires skilled talent. Your brand should never hand its social marketing over to an inexperienced marketer or marketing team without making sure there exist true capabilities and talent to develop, design, produce and execute the volume of creative needed to have successful social channels.”

1. Misconception and misuse of social media

The problem: Social media is often (and incorrectly) perceived as a ‘nice-to-have’ but unnecessary by many SMEs. I’ve met many business owners who are sceptical about social media and its place in the business environment. Sometimes, the only reason that the brand even has a social media presence is because its competitors do.

Social media is also typically viewed as a platform for brand-centred content. Some use it purely for hard-sell advertising posts, while others use it as an online company bulletin board. Both are completely ineffective ways to use social media.

Related: 10 Laws Of Social Media Marketing

Why you should care: A lack of understanding often leads to misuse, and this is particularly true of social media. A vicious cycle results: Social media is already viewed as a waste of resources, but it’s still used (incorrectly) to push sales or publish fluffy content. These strategies (or lack thereof) do little to promote business goals, strengthening the view that social media has no place in business. An example of a self-fulfilling prophecy if ever there was one.

Worse still is the misconception that your social media pages are there to solely promote brand objectives. This could cause serious brand damage as social media users expect, no, demand, attention and value from brands. Failure to meet such needs risks losing current and potential clients that perceive the brand as being ‘self-centred’.

What you should be doing: Social media is a powerful business tool and should be treated as such. It has the capability to serve as an integral component of your organisation, and as a key catalyst for growth. For SMEs, social media holds incredible value, including the options of extensive audience reach, detailed consumer targeting and sales generation. Effective, well-strategised use of social media is the path to achieving these tangible returns.

From a content perspective, the main point to remember is this: It’s not about you. Unless you’re Kim Kardashian, nobody cares.

Social media is all about the user experience. When creating a post, view it from an audience perspective to ensure it has user-value of some sort. Ask yourself these questions: Is it informative? Is it interesting? Is it useful? Is it entertaining? If you can’t answer yes to at least one or two of these questions, don’t post it. Research your audience and craft posts that they are likely to engage with (i.e. like, comment and share).

According to dreamgrow.com, 46% of users will stop following a brand’s social media platforms for sharing too much promotional content.

2. Assigning management of platforms to junior and/or untrained staff

social-media-marketing-advice

The problem: Most SMEs view social media management as a non-essential, non-priority task. The general practice seems to be assigning this role to junior and/or untrained staff, such as interns, receptionists or any employee that happens to be available.

Why you should care: Consider this. A social media page is potentially the single most impactful touchpoint for a brand, making it a highly critical, powerful and very public portal. And then consider that many SMEs assign complete management and control of this critical contact point to junior or untrained staff. Can you spot the reason for concern?

Not only does this open you up to risk ranging from an undesirable public reaction to an unsuitable post or response, but in serious cases, could also result in legal action.

Aside from such drastic situations, poorly or inadequately managed social media pages generally lead to a negative consumer perception of the brand as a whole.

What you should be doing: Treat the position of social media manager the same as any other role: Assign it to an individual with the required knowledge and experience. As most SMEs are unlikely to already have a social media expert within their team, this could mean recruiting a new employee or agency.

While this sounds like an awesome solution, it may not be practical for SMEs with budget restrictions. In this case, consider ways to use current resources. For example, get managers of different departments to provide input and suggestions for content, as well as approve relevant posts. If possible, assign non-critical tasks to junior staff as a means to free up time that senior staff can then dedicate to social media.

Related: 7 Social Media Marketing Secrets No Marketer Wants To Admit

3. Not using paid advertising

The problem: SMEs often allocate little or no financial resources to their social media activities, such as Facebook paid ads. Instead, they rely on organic reach or inbound audiences.

Why you should care: For someone to see an unpaid post, they would need to actively search for your page themselves. This is the equivalent of leaving a stack of printed flyers on a table in a corner and hoping that people would stumble across it.

The recent Facebook Feed change further necessitates the need for paid advertising — the new algorithm restricts the organic reach of business pages. This means that the only way to get any real exposure is through paid promotion.

What you should be doing: Paid advertising means that you actively distribute your message to consumers. Your content appears directly in users’ content feed — they are exposed to your message even if they have never heard of your brand. What’s better, targeting means that you can restrict this to your desired demographic — it’s like handing out those above-mentioned flyers to a room full of people who have already indicated interest in your product or service offering. The result? High conversion potential and little to no wastage on irrelevant market segments.

(At this point, you may be shouting that you don’t have money for paid advertising. But keep calm and read on.)

Social media advertising is highly affordable. For example, Facebook promotions start from as little as R100 a post. Even though realistically you would need to invest a bit more to get decent results, the point is that it’s accessible even on a shoestring budget. Important: Read up on the dos and don’ts when attempting paid advertising for the first time (especially regarding setting spend limits).

4. No structured social media strategy

The problem: The vast majority of SMEs have a social media presence that lacks any sort of structured strategy. This is evidenced by a number of factors, including erratic frequency of posting, unclear purpose of posts, and even content that holds little relevance for a brand.

Why you should care: Without a planned strategy, your social media activities lack purpose. Any business task that serves no clear function or purpose is a waste of resources. It’s no wonder that decision-makers are reluctant to invest in social media as a result.

“Almost 90% of marketers say their social marketing efforts have increased exposure for their business, and 75% say they’ve increased traffic.” — www.smallbiztrends.com

Related: 5 Tips To Generate Sales Leads Through Social Media

What you should be doing: Rather than being an isolated function, social media activities have to form part of an integrated strategy linked to core brand objectives. The starting point is to identify priorities across your entire organisation, and then list key focus points. For example, if you have a current promotion, you can drive sales by targeting consumers through a paid social media ad. If you are looking to grow brand awareness, you can create user-centric content crafted for high reach and engagement. If your current focus is on product development, send out a poll to gain insight into consumer preferences.

Once planned, content then has to be crafted and scheduled to form a well-balanced strategy. This then needs to be tactically executed accordingly, incorporating a budget for social media ad spend to realise tangible results.

A result-driven strategy means that you can now measure return on investment. This includes social media generated stats (such as engagement rates and brand reach), as well as business data (such as sales volumes or leads). And once the numbers are out, my prediction is that decision-makers will become much more willing to allocate resources towards social media activities.

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Online Marketing

Local SEO Is A Digital Marketing Tool That Most South African Businesses STILL Aren’t Using

You’ve has been using Search Engine Optimisation for a while now. But what about Local SEO? Make sure you go above and beyond when listing your business.

Steven Slotow

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If you’re running a business in the 21st century, you’re at an advantage. There’s never been more information freely available to your audience that’s working 24/7 to ensure that your business becomes successful, and nowhere is this more evident than when it comes to your marketing efforts.

The average South African business owner has a keen grasp of the power of marketing and leveraging a business brand in an advantageous way. Despite this, too many still stick to the same old means of online promotion (SEO which is frustrating in a competitive industry and AdWords which is expensive in almost every industry), with many valuable tools getting left behind in the process.

Canvas any number of digital marketers in South Africa, and you’ll find that many of their clients seem to stick to these more popular digital marketing efforts (SEO and Adwords), leaving otherwise fruitful options on the shelf gathering cob webs.

One of these incredibly effective and yet sinfully under-utilised digital marketing tools is Local SEO.

Just because it’s obvious, doesn’t mean everyone’s doing it…

Consider the following statistics:

  • According to Google, a third of all online searches are location related.
  • Over two thirds of people conducting searches on their smartphones prefer businesses that offer location customised information.
  • While searches using terms like ‘closest’ and ‘nearby’ have dropped, searches using terms such as ‘near me’ have increased.
  • The majority of people who conduct a local online search end up visiting a retailer within 8 kms of their location.

This tells us that while customers still want to experience a product in person before buying it, being able to locate the closest retailer and get their contact details and address online is critical. We can also see that customers now expect search engines to automatically use their geographic locations to provide them with relevant information, without them having to volunteer it.

Businesses should be falling over themselves to tell customers who they are, where they are, how they can be contacted and how a customer can get there. All this information (and much) more can be populated in a matter of minutes in a business’s Google My Business Listing.

And yet, the Local Search Association, tells us that 56% of businesses have yet to claim their Google My Business Listing.

A wasted opportunity indeed.

Related: Beginners Guide To Digital Marketing In South Africa

Tips for a better than average Google My Listing profile

google-my-business-listing

Claiming your Google My Business Listing is pretty simple. It costs nothing, and you don’t even need to have a brick and mortal storefront to get it. Using a Google account, you can have yours set up and verified in two simple steps. The trick is not to stop at just the information required and instead to include over and above what’s being asked for. This could include the following:

  1. Asking your loyal customers for reviews. This will generate an average rating out of 5 that appears on your listing. Make sure that any less than stellar review is attended to and not ignored, as you’ll be judged on how you respond to these as well.
  2. Claim your map listing: Ensure your location information is accurate and that your map listing brings customers directly to your doorstep.
  3. Track and tag your location information. This will involve specialised SEO expertise, as it allows you to see what traffic is coming from map listings and searches as opposed to organically.
  4. Make it easy to make contact: Make it as simple as pushing a button for a customer to get in touch with you. Show them exactly what they should do to take the next step with your business without any confusion or ambiguity.
  5. Upload the right photos: Uploading a photo of your business logo is great. What’s better is including images of your product and service in use.
  6. Create a mobile only website: As mentioned earlier, many customers are going to be encountering your business for the first time on a smartphone-sized screen. Will your website load quickly if they click through to it? Ensure that you have one that’s easy to navigate, read and act on.

Finally, and most importantly, be prepared to actually convert any customer that ends up on your website into a sale. This means answering every call and email and chasing up leads. Be prepared to answer their questions to help them make a purchase and if they aren’t ready to make one yet, ask them if you can email them about future offers and promotions.

Within a few months you’ll be kicking yourself for not paying attention to your Local SEO sooner.

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Online Marketing

Putting The Brakes On Insta-Fakes

A huge following means nothing where there is no trust.

Daniella Shapiro

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Is it possible to buy friends? In the realm of influencer marketing, some brands seem to think it is. Let’s call a spade a spade: paid-for likes and shares create what is essentially a fraudulent illusion of high product endorsement.

“Sponsored” tags embedded deep within posts’ comments sections are inevitable. And because higher following means more attention, everybody feels the pressure to keep up. However, once an influencer is exposed as excessively using bots to generate traffic, they are black-listed. So it’s a catch 22 for brands who lack true grit. Most importantly, consumers value brand authenticity. A huge following means nothing where there is no trust.

Keeping it real is the new deal

Brands may find themselves treading a fine line, because influencer marketing has gone mainstream and is highly lucrative, bringing in almost $2 billion revenue in 2016, often delivering an 11x higher ROI. Of course, paid endorsements are almost old school now; they are common practice, and marketers have come to depend on this tactic.

32% of marketers say they cannot live without them. Nevertheless, there needs to be a balance between showcasing high-end popularity, but also communicating brand experience from everyday people. Relatable feedback builds connections between consumers and brands. Trust in a brand is invaluable in the long term.

Related: How To Become A Marketing Influencer Before You Turn 30

Living the dream?

With great power comes great responsibility. If you could buy likes and followers at a vending machine, would you? Well now you can, in Moscow, via credit card none the less.  This seems a far cry from the good old days of word of mouth brand recommendation. What happened to an endorser epitomising what the brand stands for, having actual connections to and experience of the brand? Consumers want true stories, relatability, and can tell the difference between what’s hot and what’s “bot”.

Cautionary tales

New measures are being taken in an attempt to weed out fake media frenzies. The Federal Trade Commission (FTC) has sent “reminder letters” to some major influencers due to inadequate disclosure of bought advertising. The FTC now requires that more restrictive guidelines be followed, including disclosure in the first three lines of text of a post. Sanctions of up to 20 years have been imposed for inadequate disclosure.

Positive reinforcement

One suggestion is to shift the focus to incentives for disclosing paid-for sponsorship; for example, boosting posts that make disclosure. Instagram is moving towards a standardised disclosure process. Posts may soon include a tag disclosing paid partnership which also allows partners to view data relating to engagement.

Problem children

Bot spotting is easy for the savvy consumer. Extreme peaks and lows in comments and engagement disproportionate to the number of followers per user generally indicate misleading marketing ploys.

Instagram has unfortunately created the perfect environment for “pod problem”. Some influencers use Instagram’s algorithm to increase their visibility in Instagram’s Explore tab. This is done by joining with other influencers in a mutually beneficial relationship to make daily comments on each other’s posts. This increases engagement numbers and visibility. False brand competition and, ultimately, a disconnect between brand and target market are the undesirable results.

Related: The Launch Of Instagram TV

Elementary

The most vital element in the brand-consumer relationship is authenticity.  This is not a new concept, but it is refreshing to step back and recognise what matters. Brands with foresight see further than likes and shares. People want integrity and ethics from brands that are relatable to real lifestyles and needs. Quality brands will generate engagement because of what they stand for, without the need for grandstanding.

All we can hope is that with any new trend, the kinks get ironed out and these #ad posts get less #annoying and more #authentic.

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