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.
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
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?
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:
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.
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.
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.
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.
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?
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.
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.
10 Online Marketers To Watch In 2018
The more diverse your sources of news and inspiration, the better. These ten people can help get you there.
Online marketing requires experience, creativity and a working knowledge of the latest trends and technologies necessary to stay competitive in the modern landscape. And while there aren’t any shortcuts to gain more experience, there is a convenient way to stay up to date on the latest marketing trends and get inspiration for your creative campaigns.
That way? Following and paying attention to the best, smartest marketers in the industry.
With 2018 just getting started, I wanted to list some of my favourite marketing influencers, some of the most influential experts in the industry and some of the most promising creative minds to pay attention to this year:
The Best Conversion Rate Optimisation Tips To Help You Grow Your Business
Whether you’re the owner of a company, or an online blogger, knowing conversion rate optimisation techniques will help you immensely.
Conversion rate optimisation, otherwise known as CRO, is a 21st-century way to turn visitors to your website or blog into followers of your information or customers of your product or service.
Therefore, whether you’re the owner of a company, or an online blogger, knowing conversion rate optimisation techniques will help you immensely.
What Is Conversion Rate Optimisation or CRO?
Internet marketing, or what some people call online marketing, is promoting your product or service on the Internet through the digital channels available. Driving traffic is to your website or blog is hard, but it’s something you need to do in order to sell your product or service, so the last thing you want is to leave money on the table.
Traditionally, from the traffic you drive to your blog or website, a percentage of that traffic will become your customers or followers.
CRO is conversion optimisation strategies that puts a focus on your blog or website to determine what small or big changes need to be made to convert as many of your visitors as possible.
It’s the classic case of not working harder, but smarter.
Changes such as a new headline, new sales copy, a different coloured CTA (Call-to-Action) button, and more, are tested for effectiveness. This helps you take out all the guesswork and make changes that are proven to convert more sales.
Techniques such as A/B testing, where you create two different landing pages and send the same amount of traffic to each, is one example.
At the end of the day, the version that receives the most conversion is the one you would choose. A site with significant traffic may successfully test over a shorter time. On the other hand, in order to get accurate data, a site with a smaller amount of traffic will likely need more time than a larger one for testing.
What Happens When You Convert More Visitors Into Customers?
It’s a no brainer, when you convert visitors into clients and customers, your sales increase, and that’s the number one goal of any company or business. CRO can help you grow your business by receiving the same amount of traffic that you’re currently receiving.
Technically that means that you can make more sales without having to spend more money on marketing.
That also means that you’re not focused on the number of traffic you pull in with a mind on percentages, but rather focused on making the most of the traffic you currently have which makes the most of your marketing efforts.
Not Utilising CRO Means You Are Leaving Money on The Table
Let’s say you’re a small company with a goal of R50,000 a month in revenue. Your job is to turn a percentage of your visitors into customers. Without the correct conversion rate optimisation strategies, you’re looking strictly at numbers. You find that 1,000 visitors turn into 50 customers with a revenue of R20,000, which is R30,000 away from your goal.
Without the correct CRO strategies in place, you would work to increase the number of visitors to your site. However, with CRO, you implement e-commerce CRO tips that result in those 1,000 visitors turning into 125 customers. That brings you to your R50,000 goal. Without performing conversion rate optimisation, you’ve left R30,000 on the table.
Now that you’ve reduced your cost per acquisition, or what you pay per sale or click or form submit, you can either invest more in advertising or just bank the profits. Now that you understand what conversion rate optimisation is all about, let’s have a look at some of the best strategies that can help you take your business to a whole new level.
20 Of The Best CRO Strategies
You can spend loads of money on a fancy website or blog, but if it isn’t converting correctly, you’re losing customers and sales. That’s why conversion rate optimisation is becoming the number one priority with websites and blogs in the 21st-century.
1. Create an Effective Headline
If you are trying to convert visitors into followers or customers from a specific post, then your headline is one of the most important elements. It’s not there for a hard sell; it’s there to draw your potential customers to your site so that they’ll check out your product or service.
Your headline must show people what benefit they will receive from using what you have to offer.
Keep changing up those headlines till you find a strategy that works.
2. Reduce Huge Blocks of Text with Bullet Points
The way you present the content on your website is crucial. Give a potential customer too much information, and they’ll leave your site with eyes glazed over. Any material you present should be not only easy to understand but short and to the point. One of the best ways to do that is with bullet points.
Bullet points create an organised presentation that keeps potential customers interested.
3. Include Your Contact Information
Significant changes can be done to your website or blog to increase conversions, but so can small ones. Include your contact information on your site or blog. This shows that you’re accountable and don’t mind being contacted, which can lead to customer trust and eventually sales. Include your phone number, email address, and even your mailing address.
4. Replace Phony Stock Photos
You know what a phony stock photo looks like. It’s the kind that you purchase from stock photo sites, and they’re the kind that you often see at more than one website. These types of photos look phony, and they reduce your credibility. Replace fake-looking stock photos with professional, unique photos or good quality photos that you’ve taken.
For example, instead of using a stock photo model with a cheesy grin, use a picture of one of your employees.
5. Use a Pop-Up Form
One effective way to convert visitors into followers and subscribers is a pop-up form. When visitors come to your side, a form pops up that encourages them to leave their name and email address, or just their email address, to become a subscriber. When you have a list of subscribers, you can then turn them into customers through newsletters, emails, etc.
6. Eliminate Unneeded Form Fields
A website or blog that is not user-friendly when it comes to form fields may not translate to customer conversion. A form field is where your customers type in their information. What is the bare minimum of customer information that you need? You ask for the name, but do you also need the company name, for example, or can you do without having a customer type that in?
7. Remove Automatic Image Sliders
Images that flash before your eyes automatically may look attractive, but automatic image sliders have been proven to create banner blindness and therefore, reduce conversion. Use static images instead.
8. Include Videos
Videos have proven to be effective in drawing visitors and turning them into customers. If your site sells fishing products, for example, include a video of an expert fisherman using one of your fishing poles. Make sure the video is no more than two to three minutes long and be sure to put one on your landing page.
9. Make Your Call-To-Action Button Pop
Here is another strategy that seems small but that may prove to be very effective. Alter your call-to-action or CTA button. For example, is it more efficient for your button to say “Download Now” rather than “Buy Now”? Is it better for your CTA button to be a bright red rather than a navy blue? By testing changes to your call-to-action button, you can determine if such a change will be effective.
10. Limit Your Call-To-Actions
If you have one call-to-action button on your website, that’s a wise choice. Too many call-to-actions can confuse potential customers and turn them off from your site. Put your focus on one effective call-to-action.
11. Have You Included the Word “Free”?
If there’s one thing that people love, it’s free stuff. What can you offer potential customers that are free?
For example, let’s say you sell psychic readings. Offer your potential clients a 10-minute free reading and display the offer prominently on the front page of your site. Chances are you’ll get a lot of conversions for your niche. Once you’ve drawn in customers with the free deal, you can better bring them to your paid services.
12. Match Your Landing Page to Your Ad
When your ad matches your landing page, the colour co-ordination and organisation can translate to conversions. In addition to the colour, the copy you use on your ad should match, in some way, with your landing page. So, when you draw potential customers to your ad, you gently move them to your landing page with no sharp differences.
13. Incorporate Trust Seals on Your Checkout Page
If there’s one thing that draws customers to a product or service, it’s trust. Incorporating trust seals on your checkout page and other places on your website is an excellent way to show that you are legitimate and to increase conversions.
For example, if you are offering dental products, a seal from a trusted dental association helps with customer trust.
14. Convey a Sense of Urgency
When you are promoting a product or service letting your potential customers know that a particular price will end soon, or that a product or service will only be offered for a limited, time greatly helps with conversion.
For example, let’s say yours is a site that sells cookware and you’re providing a crock-pot at a temporarily discounted price.
You would display on your blog or website a photo of the crock pot, along with content and possibly a video, and you would show the price and when the price ends.
15. Give Them a Money-Back Guarantee
There will always be a percentage of customers who are on the fence about your product or service. So how do you get them over that hump and create a conversion? One way is to offer a money-back guarantee and to display it where it can be seen.
Keep in mind that it’s good to put a time limit on the money-back guarantee to something like 30 days or 60 days.
16. Include Live Chats
Many companies are adding live chat prominently on their websites to answer customer’s questions in real-time. This is an effective solution that can lead to conversions. It allows you to take care of all a client’s issues to lead them into a sale. Many companies utilise chat apps to help with this process.
17. Retarget Your Ads
There are large and small changes that can be made to your website to increase conversions, but changes to the way you’re handling your ads could be done as well. Retargeting customers, can help increase conversions period.
When visitors come to your site, you create a customised targeted ad to get to them as soon as they leave.
If a visitor has come to your cosmetic store looking for an eye shadow, when they leave your site you target them with an ad for a different eye shadow in your line. The goal is to keep a visitor engaged with your product or service while staying top of mind.
18. Give Them Free Shipping
Shipping costs for a product can often make or break a sale. So, if there’s one thing that can contribute to conversion, it’s free shipping. Let your customers know that shipping is not a cost that they have to concern themselves with.
If free shipping seems unaffordable for your company, work with ways to cover shipping costs with your product prices.
19. Include Real Testimonials With Photos
One of the best ways to instill confidence in your product or service is with real testimonials. Have customers write testimonials of 50 to 100 words about your product or service and include a photo of the customers next to their testimonials. Include their full name with their picture.
20. Get Customers to Share Their Purchases on Social Media
These days, almost all of your clients are likely to be on at least one social media site. Encourage them to share the purchases they’ve made of your products on social media, such as Instagram.
Every time a customer buys one of your products or your services, automatically give them an opportunity to share and talk about what they’ve bought with a user-friendly share process included on your site.
The sooner you work on conversion rate optimisation tips on your blog or website, the sooner you’ll be bringing in customers in the most efficient way.
Customers translate to profits and profits translate to a successful company or business. CRO takes time, but with patience, your website or blog will see vast improvement in conversions.
Implementing 2 Advanced Google AdWords Strategies
Find out how Dynamic Search Ads and Call-Only Campaigns can give you that competitive edge you need on Google AdWords.
Let’s explore two advanced Google AdWords campaign types: Dynamic Search Ads and Call-Only campaigns. Give these two campaign types a try. They’ll let you squeeze even more from your AdWords account.
Dynamic search ads (DSAS)
Dynamic search ads are magical keys to reaching your customers. And the best part? Using them is easy once you master the setup.
What Are DSAs?
Google knows it’s hard to keep your campaigns perfectly in sync with your website. If you have an e-commerce site with thousands of products changing regularly, it’s a chore to be constantly creating new keywords, new ad groups and new ads inside your AdWords account.
DSAs were created to fill this gap. They let you show ads to excellent prospects who might be searching for items you sell on your site even if you don’t have a corresponding keyword for them in your account.
Why should you set up a DSA?
As long as you set a low cost-per-click, dynamic search ads typically have a decent CPA and provide additional relevant traffic. They’re also great for research as you get to uncover new search terms that people are using to find your site. (You can use this intelligence after the fact to add new keywords to your account.)
Let’s say you’ve just started selling wrought-iron fire pits on your e-commerce site but you don’t have the keywords for them yet in your AdWords account. A new prospect – we’ll call her Kim – is currently online searching for this by name. Kim types it in verbatim: “wrought iron fire pits.”
If you have a DSA campaign set up, you’re in luck: Google instantly recognises that you sell these but don’t yet have keywords for the purpose. Thankfully, you don’t miss a beat with Kim – Google shows her your Dynamic ad, then she clicks, comes to your website and makes a purchase.
How do they work?
It starts with Google regularly scanning your website and keeping an index of all its pages. When you’re starting out, you can choose to point Google to your entire site – we recommend this for your first DSA campaign – although later on you can target specific categories within your site.
Google knows what keywords are in your account and, more importantly, what keywords are not there. This means they can make accurate judgments about when to step in and show your DSA ads.
When setting up DSAs, Google creates the headline and you write the description. They choose the final URL and you set the bid.
Here’s how to set up a DSA:
- Create a new campaign. One of the options you’ll see is to create a DSA campaign. We suggest not using that as it would limit your options further along. Instead, create a new Search campaign with “all features.” Your plan will be to only use DSAs inside that campaign.
- You’ll need at least one ad group to hold your DSAs, and one is typically enough if you’re just starting out.
- You still want to be split-testing, even though Google chooses your headline for you. So, create two different DSA ads with different body copy in each.
- Choose the target. Start with the “all webpages” default. Save the advanced targeting for later.
- Add in ad extensions just as you would for a regular campaign.
Ongoing management of your DSA
Review your data. Keep an eye on the search queries Google chooses, particularly in the first few days. This lets you add any new negative keywords that you don’t want your ads shown for. And it’s a good way to identify and add new keywords you hadn’t yet thought of for other functioning campaigns. (You can add these new keywords as negatives in your DSA campaign, which forces that keyword traffic over to new campaigns in your account. Your DSA campaigns won’t be affected.)
These allow you to create search ads where Google shows your phone number rather than a headline. As such, they only show on mobile devices capable of making calls.
A person clicks on your ad, which starts the process of calling your business directly from their mobile, rather than taking them to your site.
Why use call-only?
Call-only campaigns force people to call your phone number rather than visit your site. If generating more phone calls is high priority for your business, call-only campaigns are worth testing.
How to set up call-only campaigns
Setup is simple. You can create a new campaign from scratch or just copy your existing search campaigns and change the ad type. Replace regular ads with call-only ads.
Tip: Google wants to see individual ad groups with a reasonable number of impressions at the ad group level. So a small number of ad groups with more keywords in each one – generating more impressions per ad group – will work better for call-only campaigns.
This article was originally posted here on Entrepreneur.com
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