How Much Should I Spend on Digital Advertising?

Written by Roy H. Williams, author of the New York Times and Wall Street Journal bestselling “Wizard of Ads trilogy

Good decisions come from experience. Experience comes from bad decisions.

Bad decisions aren’t made because a person is stupid. Bad decisions are often the result of logic. The first thing experience will teach you is, “Not everything logical is true.”

Logic among advertising professionals says, “Always target the right customer.” But if you embrace that premise,

1.      You will gravitate to online marketing because it allows you to reach specific types of people, track results, gather data, and hold your ad budget accountable.

2.      You will spend too much money to reach too few people.

3.      You will see your advertising efficiency decrease, not increase, as you grow.

4.      You will fail to become widely known.

Alex Iskold is not an advertising professional. Alex blogs about startups and venture capital as the Managing Director of Techstars. He was previously the founder and CEO of Information Laboratory, which was acquired by IBM, and Chief Architect at DataSynapse, which was acquired by TIBCO.

In other words, Alex is a tech guy.

His home page bio says “An engineer by training, Alex has deep passion and appreciation for startups, digital products and elegant code. He likes running, yoga, complex systems, Murakami books and red wine. Not necessarily in that order and not necessarily all together. He blogs about startups and venture capital at http://alexiskold.net ”

Recently, he wrote,

“2019 was the year when VCs and startup founders soured on paid acquisition. Contrary to what most thought a few years back, CAC (Cost of Acquiring a Customer) didn’t go down as many D2C (Direct-to-Consumer) startups scaled. The costs instead went up.”

“The explosion of D2C brands and mega rounds of funding led to massive amounts of capital deployed into advertising. All this cash flooded Facebook, Instagram and other social channels, and bid up the costs of Google ads. We’ve heard that these channels have become saturated, and that the companies are seeing diminishing returns on spending additional advertising dollars.”

“We also heard that consumer’s attention has become fragmented and that, combined with increasing competition for eyeballs from the brands and saturation of the channels, has led to increases in CAC (Cost of Acquiring a Customer).”

“While all of this is absolutely true, this is only 1/2 of the story.”

“Why startups struggle to scale: The reality is that unless you have strong word of mouth, you are forced to spend money to grow your customer base. And that relationship between the spend and the growth is linear. The more you spend on marketing and advertising the more customers you get. On the surface it sounds great, but if and when you dial down your spend – your growth stops.”

Mass media includes television, radio, and outdoor, each of which is shockingly affordable when compared to the cost of paid, online advertising.

I have a number of friends who own large, online companies that sell millions of dollars per month – Direct to Consumer – around the world. The average brick-and-mortar business invests 5% to 10% of topline sales into advertising. My buddies who own D2C online companies are spending 30% to 35%.

The logical criticism of mass media is best summarized in a statement that has been aimed at me hundreds of times by promoters of online targeting, “You’re using a shotgun, but I’m using a rifle with a scope.”

But the shotgun vs. rifle argument assumes that the costs are reasonably equal. But the simple truth is that you can reach thousands of untargeted people for the price of one, targeted person. And among those thousands of untargeted influencers will be not just one, but several of the people you would have targeted. The familiarity you win and the reputation you gain and the word-of-mouth you trigger by reaching all those untargeted influencers will be yours at no extra charge.

But if you leverage your budget into local, mass media,

1.      You will feel certain that you’ve made a mistake during the early months when you’re not seeing significant results.

2.      You will experience a time when your rocket ship finally begins accelerating, if you don’t chicken out. We call this window “breakthrough.”  You will see your advertising efficiency increase, year after year, as you grow. you will become widely known.

The voice of experience says, “If you want to be the one customers think of immediately and feel the best about, use mass media to reach the masses. But be sure to tell an interesting and memorable story.”

You’ve heard me say all this before, right? But the truth is always a paradox.

And the other side of the truth about the wonderful efficiency of mass media is that sometimes it isn’t a fit for what you need to accomplish.

I just approved a plan to use geofencing and geotargeting to reach the people in a specific group of buildings in the downtown area of a major city. Surprised? The cost of mass media in that city was beyond the limitations of our budget, so we’re moving ahead with a highly targeted online campaign.

It’s the only way we can shrink the city to a size that we can afford.

We’ll reach surprisingly few people, but each of those people will be in exactly the right location to take the action we’d like them to take.

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