How much money should you be allocating to each channel in your marketing mix?
One simple answer is that you should calculate the ROI of each channel and then shift your budget from the less profitable channels into the more profitable ones. But, even leaving aside various challenges with measuring ROI across a multitude of digital and offline channels, this approach is problematic even assuming you could get accurate numbers. It fails to take all sorts of factors into account, such as the value of emerging channels versus established ones, the difference between awareness marketing and lead generation, and the impact of one channel on another to create a sum greater than its parts.
But the opposite approach -- not measuring at all, but simply planning budgets by instinct or by what "feels" right, is even worse. If you have no idea how your various tactics are performing, then you're flying blind. And as demonstrating ROI becomes increasingly important for marketers, there's no way that such a laissez-faire way of planning is going to work for very long.
It occurs to me that we need a different approach -- one that takes a holistic view of multiple channels and tactics, and drives towards a common goal, but which allows for different performance objectives for each tactic.
Such an approach exists. Our friends in the financial planning industry have been using it for years. They call it portfolio planning.
Planning a Portfolio Strategy
If you, as an individiual, go meet with a financial planner or investment advisor for the first time, chances are, you'll go through a familiar series of steps. First, the planner will ask you some questions about yourself: Your life, your age, your family, your career, and your current financial situation. Then, you'll be asked about more abstract things, like your goals, priorities and values, or your tolerance to risk. And the advisor will also take the broader market context into account, including recent and expected performance of equity, interest rates, and global economic conditions.
After this, the advisor will crunch some numbers and will present you with a plan. This plan will include the short, medium- and long-term goals, and the recommended strategy including target asset allocation in each investment category. There will probably be percentage goals for how much to invest in high-risk investments like volatile stocks, how much to invest in blue-chip or safer equity, what percentage should go into more stable investments like savings bonds, what your priority of income versus growth should be, how to plan to maximize tax benefits, and the like. There should be an appropriate amount of diversification -- enough to spread the risk around as much as possible while minimizing the effect that transaction and management fees will eat into your returns. And the plan should be reviewed regualarly and updated to take new developments into account.
Well, digital marketing planning is a lot like financial planning. Deciding where to invest your marketing dollars is much like deciding where to invest your savings. In both cases, you're trying to time the market in order to maximize returns. In both cases, you're trying to invest your money into a diverse range of channels - some riskier, some safer - in order to accomplish some goals.
Asset Allocation and the Channel Life Cycle
Everyone who's ever taken a marketing 101 course knows about the concept of the product life cycle graph, which demonstrates the phases of a new product from introduction to early adoption, through to growth and mass adoption, and finally to decline:
This same graph can be applied to look at channels, not just at products. The average promotional marketing mix will include channels that range from the the brand-new and untested to the well-established and everything in between.
By taking a portfolio approach to planning, we can categorize channels in much the same way as we categorize investments: Emerging channels are the highest-risk category, and mature channels offer lower risk but lower potential return. How much to invest in each depends on your overall portfolio plan.
Innovative new channels - these are high risk, high potential return, but tough to quantify or predict. And because they're so new, you may just be testing the waters and even be unable to measure returns in the channel just yet. In many of these cases, you're taking a leap of faith.
Companies with a high concentration of dollars in this first channel are often startups or those with high risk tolerance and a propensity for early adoption.
Growth channels are those where the model is more clearly defined. They're in rapid growth phase, though, so you have to keep investing dollars into the program in order to ramp it up and get it to where it starts to yield more efficient returns.
The ROI of these channels might be lower in this phase. But this is an investment. You're putting money into building the infrastructure, testing, growing and ramping up the program, with the expectation that it will pay off after a certain amount of time.
It would be unfair to do an apples-to-apples comparison between a growth channel and one that is already firmly in the maturity phase.
It would be like - using a direct marketing analogy - moving your dollars from acquisition into renewal. Sure, you'll make better returns in the short term. But without feeding your program with newly-acquired customers, you'll soon erode your base, and see overall returns diminish.
The key to success in growth channels is determining what you are reasonably prepared to invest to ramp up. There's a balance to be struck here: Invest too much too fast, and you raise your risk significantly. Invest too slowly, and it might take you too long to start to see results. Not to mention, you face a different kind of risk - that the market and the parameters will change before you have a chance to roll out your program.
Once your channel hits maturity, you're coasting. You've defined the success model, invested the money to ramp up and grow the program, and now you should be seeing the dollars pour in. If your marketing portfolio is balanced, you will be spending the majority of your dollars here, in rollout programs.
There are still risks for mature channels, though. You need to be constantly tweaking and optimizing in order to maximize returns. If you're not doing this, you could be pouring money into a suboptimal program or channel. The speed of change in this industry is such that you can't rest on your laurels for long. There will always be someone younger, faster, more nimble, coming along trying to chip away at your successes.
And of course, maturity phases are getting shorter and shorter. Some digital channels give you a very small window before they start to go into decline. That's why there's no such thing as getting too comfortable.
Channels in decline.
The thing is, just because a channel is in decline for most people doesn't mean it isn't still valuable for you. The masses moved out of MySpace but some independent musicians are still finding success there. Most consumers are buying their music from iTunes, but secondhand record stores are still doing a nice job selling rare vintage vinyl to hipsters. There's still tremendous value in direct mail for nonprofits, or in directory (yellow pages) advertising for many local businesses.
Channels in decline offer a number of advantages. You can reach a niche market or specifically target innovation laggards. You have less competition so it's easier to own the space. Your media costs are lower.
Before dismissing a channel as "dead" or "passé", crunch the numbers. If you're still making good money, then there's probably still value for you in being there.
Diversification and Risk
Everyone has a different tolerance to risk when investing. In much the same way, every brand has a different suitable mix of risky to established marketing channels. A lot depends on how established the brand is in the marketplace, how much support it has from investors or parent companies, and what the product life cycle is.
But just as much depends on the individual personality of the brand, or of its owners. Some brands will stay the course and stick to the tried-and-true. Others, by their very nature, push the envelope and take risks.
There's no single answer to this. But when working out how much budget to put into emerging channels versus established ones, it's important to acknowledge the impact of risk on this decision.
Then there's the question of diversification. Every marketer knows that putting too many eggs in a single basket can be disastrous. Diversifying your marketing planning can cut down on risk significantly, even if you are pouring most of your dollars into risky emerging channels. But there's a limit to this: Breaking up your budget into tiny pieces will basically prevent you from making any kind of significant impact anywhere. It's important to only diversify as much as the budget allows, and to ensure that all selected channels have appropriate budgets to allow you to accomplish your goals. If not, then it's probably best not to even go there.
Putting it all Together
Ultimately, your marketing plan should look like an investment plan, with allocations for channels in each of the four life-cycle phases. This is a great way to figure out where to place your budgets. It also allows you to create realistic ROI targets for each channel based on its life cycle phase, and helps avoid apples-to-oranges comparisons.
And, just like investment planning, it forces you to sit down and take a hard look at your long term objectives. If nothing else, the exercise is worthwhile just for that.