Balancing growth with profitability
It’s a question every founder, marketer, or likely both, has run into: How do you actually balance growth with profitability?
Below are some tactical tips and strategic reminders:
1. Prioritize Contribution Margin Over Revenue
In the world of direct-to-consumer (DTC) marketing, the term "contribution margin" is gaining prominence, and for good reason. It's essentially the primary goal of online advertising: to generate higher gross profit after considering advertising expenses. The key here is to shift how you report and make decisions internally. Instead of focusing solely on revenue, aim to maximize contribution margin. Tailor your ad funnels and offers to maximize this metric. Encourage your teams to think in terms of contribution margin rather than revenue. It's vital to measure contribution margin in every test, as opposed to just focusing on metrics like average order value (AOV). The goal should be to increase gross profit per session rather than just boosting revenue per session.
2. Implement a Blended Constraint
When deciding whether to allocate more budget to a specific channel or overall advertising efforts, you should not solely rely on channel-specific metrics like Facebook's Customer Acquisition Cost (CAC). Especially for brands looking to optimize for profitability without a significant base of returning customers, this approach is a mistake. To achieve both profitability and healthy cash flow, consider using blended key performance indicators (KPIs). Strive to grow organic and paid revenue together to maintain a balanced Customer Acquisition Cost (CAC). In many cases, it's beneficial to establish a Maximum Effective Revenue (MER) constraint. For example, if you aim for an MER of 4, limiting ad spending to 25% of revenue, you should adhere to this limit. If your MER exceeds this threshold, consider increasing ad spending. However, if your MER is below the threshold, even if your Facebook CAC appears favorable, don't rush to increase ad spending. Instead, focus on diversifying traffic sources like email, SMS, and organic growth before scaling.
3. Diversify Creatives, Not Just Platforms
While you might have heard the advice to diversify paid traffic sources, for many businesses, it's more effective to maximize your primary paid channel and diversify your ad creative instead. Creative plays a crucial role in controlling the audience you reach on platforms like Meta. To scale effectively, don't just rely on finding "winning" ad campaigns and duplicating them. Explore different product offerings to appeal to various customer avatars or age groups, and experiment with diverse creative styles. The Meta platform excels at identifying the types of content that engage users, so diversifying your creative formats can be highly effective. Consider using a mix of hero videos, mashups, static images, gifs, press callouts, direct response offers, user-generated content (UGC) mashups, short product demo videos, and whitelisted UGC. To simplify the process, platforms like Insense can be incredibly helpful for managing and collaborating with creators, getting whitelisting access, and optimizing your creative strategy.
4. Improve Conversion Rates and Contribution Margin
In the competitive landscape of online advertising, CPMs (Cost per thousand impressions) are unlikely to become more affordable. In fact, they may rise with increased spending, potentially causing a decrease in conversion rates. While building a business capable of withstanding CAC (Customer Acquisition Cost) inflation is essential, it's crucial to enhance conversion rates to boost contribution margin. Utilize no-code tools that empower your internal marketing team to conduct tests and optimizations efficiently. Consider employing tools like Replo to streamline this process. Remember that the ultimate goal isn't just raising conversion rates; it's about maximizing contribution margin. Test various aspects, such as shipping prices, offer optimizations, comprehensive conversion rate optimization (CRO), and continuous testing of evergreen paid social landing pages.
In summary, many of these strategies are not entirely new, but implementing them effectively is the real challenge. Actions speak louder than words. The key is to establish systems and a culture within your business that can effectively put these strategies into practice, which is where the true value lies. We hope you've found these insights valuable and can put them into action in your week ahead.
