Updated: Sep 10, 2020
The difference between ROI/ Profit and Market Share based goals.
The statistics behind setting goals are very fuzzy. The most widely accepted study on the matter was conducted by Harvard Business School in 1979 and claims that those who created solid goals and wrote them down with a plan were on average 10x more successful than their peers who did not. Since then, the study has been taken by multiple blogs, news outlets, and publishers to create content that claims to have "cracked" the code to goal setting and therefore being successful. By contrast, there are also multiple researchers who have published articles claiming that the Harvard study was inherently false and had multiple issues.
We have no idea how much setting goals will increase the likelihood of making you successful, but we do know that they are extremely useful in business and marketing. Goals give a target to aim for and help in setting a course to accomplish that goal. Goals also make sure that everyone on a team is on the same page and that everyone knows what the expectations are for a campaign.
There are many types of campaign goals in digital marketing. You may attribute the "Objectives" in certain digital ad platforms as goals, and they definitely are, but there are many more goals that you can set. A few of those goals include:
Target ROAS (Return on Ad Spend)
Target ROI (Return on Investment)
Target CPA (Cost Per Acquisition)
With so many possible goals that you could set, we've found that they separate into two categories; Profit/ ROI and Market Share.
Josh and Aaron discuss setting goals in the Marketing Tip Tea Time at 2:22 episode below!
ROI & Profit Based Goals
What exactly is ROI (Return on Investment)? One of our favorite websites to look up financial term definitions is Investopedia. They define ROI as "a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio." This means that ROI is really used as a tool to put profit into perspective.
With this type of strategy, the aim is to have your ad spend in the "sweet spot." The "sweet spot" is the point right before your ad spend begins to see diminishing returns, meaning that it will be maximizing your returns regardless of volume. Think of it as maximizing the amount of money you will get back for every $1 you spend.
Lets say a campaign's ROI is 5x with an Ad Spend of $1,000. This means that for every $1 you spend, you would get $5 in return. However, if instead you spend $1,500 and get a $6,000 return you'll have a 4x ROI. This means that for every $1 you spend. you'll get $4 in return. The second option produces an inferior ROI compared to the first, thus ROI is maximized at a $1,000 spend. However, you would still make money either way. Our strategy would depend on whether your goal is to maximize the efficiency of each $1 spent or if you want to maximize total profit/ revenue.
Real-Life Example from a Current Client:
A client asked about how much we could spend on a campaign to maximize free trial signups. We ran some forecasts using Google's forecasting tools to see how far we could push the Ad Spend and how many conversions we could achieve. First, we forecasted the month of September (30-day forecast) using historical data from the campaign in the last week and the Ad Spend they're currently spending per month ($650).
As you can see in the graph, the client is right in the "sweet spot", right before returns start to really diminish. They can increase their ad spend past this but they will get proportionately less in return. In the next example, we've increased their monthly ad spend to $1,000. Note the large change in CPA and the small change in the number of conversions.
They would only get 7 more conversions with a $350 increase in Ad Spend, which is over half of what they're spending to achieve a projected 41 conversions. Financially, it doesn't make much sense to increase the budget, but the client's priority is getting as many free trial signups as possible without seeing a negative return. With a projected value per conversion of $115.20, we could technically increase the cost per acquisition to $115.19 (if we don't take Zova's management fee into consideration) and still come out positive.
An ROI strategy is most useful when a client is trying to hit a target return and is essential when margins are involved with the product/ service (which is most of the time.) Anytime there is a product/ service with lower sales volume and a low LTV (lifetime value) an ROI/ Profit goal is optimal. Most businesses should be looking at this type of goal and strategy.
A market share goal is a goal in which a business wants to capture as much market share (as compared to their competitors) as possible regardless of ROI/ Profit. This type of goal can push past or even ignore ROI and diminishing returns as a method to have healthier returns far in the future. Businesses with a ton of cash are able to pull this type of strategy off. Think Apple or Coca Cola. Many times this strategy is used between two titans in the industry, like Apple vs. Android or Coca Cola vs. Pepsi.
An increase in an organization's market share can increase the LTV (lifetime value) of a customer.
Small Scale Example:
100,000 consumers regularly drink soft drinks. When they stop to get gas at a gas station (once a week) they always buy a 20 oz. soft drink. Both Pepsi and Coca Cola are $1.99 for a 20 oz. bottle. This group of consumers buys Pepsi 80% of the time and Coca Cola 20% of the time. Meaning that in 1 year, the total value to Pepsi is $8,278,000 and $2,070,000 to Coca Cola. If Coca Cola can get just 1% more of the market share (in this scenario between Pepsi) that would increase its revenue an additional $103,500 per year (while also decreasing Pepsi's revenue by the same amount.) Many times, an organization is willing to pay up to 5x the revenue of a 1% market share increase in 1 year. This means that Coca Cola would potentially be willing to spend $515,400 in a year to get that 1% increase in market share because that would mean a potential break-even on investment in 5 years (assuming they're able to keep that 1%.) Many times, large organizations are locked in a constant battle over fractions of a percent of market share for the entire life of the organization.
This is especially important to companies that are publicly traded because an increase in market share usually results in an increase in stock value. Even a fraction of a percent increase in market share can result in millions more in revenue and millions more in company valuation.
The Market Share goal strategy always comes with a long delay in realized returns, meaning that an organization will not see an increase in revenue/ profit or valuation for months or even years. Organizations that want to set market share goals need to be prepared for the long haul as the delay in return makes this a super long-term strategy. This is in contrast with the ROI/ Profit based goals, which will produce an ROI/ Profit immediately within the campaign.
Most companies should be looking at creating ROI/ Profit based goals because it helps to keep cash flow positive, which is imperative to the survival of small and medium-sized organizations. This is unfortunate, as most marketing agencies only know how to properly track metrics that have to do with market share goals.
Signs that you have the wrong goals with your marketing agency:
If a marketing agency ever attempts to tell you that likes and clicks and views are important to a campaign and weigh heavily on their judgment of a campaign's success, that is a market share goal.
If a marketing agency ever says that you'll have to spend more money than you get in return for longer than 3-6 months, that is a market share strategy.
If a marketing agency ever says that they are ROI centric, but they never take your overhead or margins into account, that is what we call "False ROI" which is actually ROAS. This means that they are looking at returns solely on your ad spend, so if they spend $100 and you get $200 back in conversion value, they might say that your ROI was 2x. This is FALSE! If your margins are only 20%, your profit is only $40, which means your actual ROI is .4x and you actually lost $60.
Many companies make this mistake: Their CPA (cost per acquisition) is more than their margin. This ALWAYS results in a loss. Let's say your product costs the consumer $100. If your margin on that product is $20 but you spend $21 to get each conversion, you lose $1 every time, no matter how many conversions you get. We have many first time clients come to us with this problem. They may have 1,000 sales in a month, but they can't figure out why they're always in the negative. Any good marketing agency should be able to spot this immediately, but unfortunately, many don't. Do not fall into this trap. Some questions to ask your agency so you can avoid this:
Have you taken my margins into account?
What is my average CPA? (cost per acquisition)
Is my CPA more than my margin?
Have you taken into account my shipping, overhead, advertising, and production costs to calculate an accurate margin?
Is this figure my return on investment or just my return on ad spend?
It's a lot of math, but it is well worth the effort.
Below Is A Snapshot of What Our Reports Look Like
Notice that we break work cost and ad spend into 2 different metrics and we report true ROI and profit, meaning that we have calculated the true value of each conversion, which in this specific report is $115.20. We also put our forecasted metrics below each result for reference and as GOALS as the campaign proceeds. In this instance, the client is receiving $1.85 for every $1 they've spent in the last 29 days.