Saturday, April 5, 2014

Should e-Commerce Ad Spend per Sale Decrease?

Moe's Bar Graph?
You run an e-commerce website with one durable product. With a proud smile, your marketing spend guru, Spike, shares a chart showing how ad spend per unit sold is steadily dropping. He gets confused when he sees a look of frustration on your face. What's the problem, this seems like 100% good news?

Well, Spike is comparing his results to prior months. Seems reasonable. What happens when you compare his results to the optimal scenario, though?

First, let's flesh out what "optimal" my mean. You know, with certainty, the following:

  1. the list of people who will buy your product,
  2. the marketing mix strategy (content, site, cadence) that will trigger a purchase from each of these people, and
  3. the cost of this ad strategy for each customer.
Knowing all of this and given a monthly budget to spend on marketing, Spike should target sales from the people with the cheapest required marketing mix. Next month, he should target sales from the REMAINING people with the cheapest required marketing mix. These remaining people are, by definition, not as cheap to market to as the first set. Continuing this process, Spike's results would actually show an INCREASING cost per sale!

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