The goal of performance marketing is to generate profitable sales. You buy leads or clicks or impressions and work to convert them into customers. Your marketing costs per sale (CPA) need to be below gross profit per sale, if you want to stay in business and keep at it for the long-haul.
To understand how they’re performing, people often look at totals or averages for a set time period. For example, in August, if our fictitious business spent $10,000 on marketing to generate $50,000 in gross profit, it seems like we’re doing pretty well. We’re generating $5 in gross profit for ever $1 in marketing spend.
If that’s the case, should we increase the amount we’re spending on marketing? It seems like it, right?
It turns out you can’t (or at least shouldn’t) answer this question from the data I’ve given you. Why? What matters isn’t the amount spent so far, but what happens with the next lead or click we purchase. How much will that incremental lead cost and how much gross profit will it generate?
If that lead performs at our average, everything would be great. We’d yield $5 in gross profit per dollar spent, and we’d probably be happy to make that deal over and over again.
But, that doesn’t usually happen. In a well run marketing program, incremental marketing spend typically has diminishing returns. This is because organizations with budget constraints will (sensibly) invest in the opportunities with the best returns first.
At some point, the return on marketing dollars will turn negative. What if the next lead in the door only generates $0.80 in gross profit per marketing dollar spent? In this case, even though we have strong overall economics for the month and could easily afford to purchase this one incremental lead, we probably shouldn’t.
What matters most in making cut-off decisions isn’t overall averages. It’s the incremental economics of the next lead or click in the door.