How To Make Strategic Marketing Cuts That Don’t Sacrifice Growth
Given the dramatic change in economic fundamentals coming out of the Covid-19 pandemic, overall marketing spend is down for most brands. Higher interest rates and volatile consumer inflation in the media have increased economic concerns and kept VC/PE firms on the sidelines for most of 2023.
Due to the ongoing uncertainty for the past year, overall consumer demand is starting to wane heading into 2024. All of these factors are causing management teams and executive boards to focus more on EBITDA, profitability and cash flow.
During tough economic cycles, marketing budgets unfortunately are typically the first area to get cut or tightened, outside of head count and technology investments. According to a May 2023 Gartner survey of 410 CMOs and marketing leaders, 71% of CMOs said they lack the budget to fully execute their strategy.
To simultaneously support cash flow needs and minimize impacts on long-term growth, CMOs need to support their C-suite partners in the finance branch with a more strategic budgeting strategy versus a reactive one-size-fits-all cost-cutting approach.
New Customer Vs. Returning Customer Analysis
When CMOs are faced with tough decisions around budget cuts, the best place to start is by evaluating how current spend is contributing to new vs. returning customer sales.
Based on our experience at Markacy, a growth marketing firm, high-growth brands in the $10 million to $50 million annual revenue range spend 30%-50% of their media budget on targeting site visitors or previous customers, users who are already significantly familiar with the brand. While some budget is necessary and helpful, this level of investment is too high and masks the focus of new customer acquisition. Moreover, CMOs are often not aware that the percentage of budget to returning users is so high, as this data is not easily available on media platforms.Skip Ad
There are several reasons brands tend to overinvest in existing customers and site visitors:
• These customers tend to have a higher reported ROAS, and when media buyers evaluate audiences or channels for optimization, they tend to allocate toward areas with higher ROAS.
• For the same reason, ad algorithms will optimize toward existing customers when given the option to do so.
• Although marketers can try to exclude existing customers and site visitors through lists, it’s a leaky bucket. Match rates for customer lists are significantly less than 100% and are often below 50% for site visitors since the advent of iOS 14.5. Therefore, even if all exclusions are in place, platforms tend to show more ads to existing customers than might be desired.
What can marketers do to ensure their spend leans more toward new customer acquisition?
• Ensure appropriate exclusions and customer lists are set up in digital platforms, and allocate budgets accordingly.
• Evaluate incrementality rigorously and frequently. Assess which channels drive more back-end new customer sales and optimize accordingly.
• Evaluate placements qualitatively. Logically, it makes sense that a conversion from a non-brand search query is almost always going to be a new customer, whereas an Instagram ad has a more mixed customer profile, and display tends to lean more aggressively toward retargeting.
Ongoing Incrementality Testing & Measurement
After evaluating the new vs. returning customer analysis, brands can likely identify areas of inefficiency across display, programmatic, native, brand search and Meta targeting.
After identifying and taking action on spend across these areas, brands should evaluate those savings against the targeted budget cuts. If additional spend needs to be cut, brands will need to implement an incrementality testing process to define the value of each piece of core media relative to the others.
Channels that typically drive new customer acquisition include, but are not limited to, Meta, Google, TikTok, prospecting direct mail, linear TV, CTV, out-of-home (OOH), audio, Amazon, and other online marketplaces and e-grocery platforms like Instacart. These will vary across brands and what their customer profile looks like.
Specific testing plans need to be put in place over multiple months to test the value and incrementality of this spend on driving new customers. To do this, brands can leverage a variety of tactics like match-market testing where they shut down, say, Meta spend in key markets for X weeks and measure how other channels across .com, marketplace and retail get affected. This is a logical and effective testing strategy to understand how much a specific source is influencing other channels in certain markets.
By doing this type of structured testing across channels with hold-out groups defined, brands can be more educated about the specific incrementality of their core channels before making cuts. This will provide more information about opportunity areas for additional budget tightening and will ensure that high incremental channels do not get misinformed cuts that hurt overall new customer growth.
Stay On Offense
Delivering more with less is one of those unrealistic clichés—easy to say and significantly harder to achieve for most marketing teams.
Beyond evaluating new vs. existing customer investments and performing a strategic incrementality testing playbook on core/top channels, brands should also be investing heavily in customer retention analysis and earned channels.
Direct-to-consumer data can be analyzed quickly for subscription churn trends, time between first and second purchases, gateway products that lead to the highest LTV, cross-sell trends, etc. Brands can garner insights on what optimizations in the retention funnel can be made that would support increasing LTV (e.g., loyalty programs, more detailed email/SMS automation flows, etc.).
Brands can also double down on earned channels like organic social media, content, press, email/SMS list growth, campaign revenue, etc.
Staying on offense is the best defense.