Level Up! Level 3: Contribution Margin-Based Campaign Optimization

A DTC Performance Marketing Framework for 2020 and The New Decade

New decade, new retail tech! SoundCommerce provides a framework for retail digital marketers to definitively prove ad spend ROI, quantify the ideal budget to balance profit and growth, and profoundly improve campaign performance.

We’re talking about true contribution margin- and customer lifetime value (CLV)-based marketing optimization, reconciled by source, medium, and campaign all the way down to specific order ID and named customer.

If you’re a retail digital marketer responsible for paid acquisition and/or retention campaigns, you are currently underfunding these programs. And at the same time you’re over spending on certain channels, segments, and goals.

This isn’t your fault. Technology limitations have thus far made it impossible to measure and optimize digital marketing programs to the ROI metrics that matter most in retail. 

There’s good news for those accountable for ad spend and performance. Technology today is dramatically better, cheaper, and faster than it was just a few years ago — enabling marketers to prove ROI at the unique order and customer level in real-time, with all the granularity and auditability to drive any FP&A planner or CFO wild.

We’re talking about true contribution margin- and customer lifetime value (CLV)-based marketing optimization, reconciled by source, medium, and campaign all the way down to specific order ID and named customer.

Level 3: “Landed” Contribution Margin-Based Marketing Performance (CMROAS)

“Our ecommerce business can never be profitable due to the high costs of digital marketing and doorstep delivery!”

Does this position (sometimes fomented by the wholesale sales team and corroborated by finance) sound familiar? 

It’s a valid concern, especially in the age of unprofitable DTC brand IPOs, and there’s only one way to respond. It requires proving positive contribution margin for every unique order with a complete and auditable profitability waterfall that incorporates cost of goods sold (COGS), marketing spend, and consumer-direct variable fulfillment and delivery expense.

Modern digital marketing requires that true contribution profit is measured and optimized as a return on ad spend metric — let’s call this CMROAS.

There are two primary challenges with variable cost accounting for ecommerce businesses today:

Lack of reporting fidelity.  Let’s summarize this one as the application of meaningless and dangerous averages. Even in the era of big data, most expense tracking and reporting happens in the general ledger, with “peanut butter” averages applied by dividing total monthly expense by total monthly order volume. What’s lost in translation is the wild cost differences between a Facebook and TikTok acquisition, the huge variation between east and west coast deliveries, and the differences in unit economics between a ten-item and a single-item package. Most modern finance organizations still struggle to discern the impact of a sale discount or seasonal mark-down on specific order profitability.

Reporting latency. This one is synonymous with steering through the rear-view mirror. Here, the problem is also driven by the (misappropriated) general ledger as the primary reporting mechanism, instead of a purpose-built data platform built for real-time and predictive decisioning. The problem with waiting for finance to close the books in order to measure contribution margin is that time has passed and the campaign you’re trying to optimize today bears little resemblance to the campaigns that drove last month’s numbers.

Modern data integration tools and data warehouses provide a strategic alternative to spreadsheets and financial software, with the goal of comprehensively tracking (“bottom up”) event data ranging from ad spend per campaign to split-shipment parcel post delivery fees — and linking and dimensioning those events into profitability insights at the order level.

Here are a few key considerations for building out an accurate and complete view of order-level contribution margin, one that is updated intraday as campaigns run, orders flow, and packages ship:

Test This Best Practice: Allocate Direct and Indirect Marketing Spend 
A growing ecosystem of martech vendors like Funnel.io and SuperMetrics provide high-fidelity ad spend collection from native ad channel APIs at Facebook, Google, and the long tail of paid ad and affiliate networks. 

Once you have spend and clickstream data in hand, the first step is to account for the ad spend that is directly attributable to cart conversions to specific transaction (or individual order) IDs for the given time period. This means testing and trusting your attribution models, as we discussed in Level 1. 

Because tracking tools and attribution models are imperfect, the second step is to allocate the remaining (unattributed or indirect) spend across converting orders in order to fully account for the entire marketing spend in the period. Stated another way, you are burdening each order with both directly allocated spend and a pro rata portion of otherwise unallocated indirect spend. 

Test This Best Practice: Quantify Packaging and Fulfillment Expense
Most warehouse management systems lack the ability to cost account at the pick and pack level. Software providers like Easy Metrics help match every labor action to its cost, helping account for variable labor and packaging costs in the warehouse. Modern packaging provider Lumi sources on-brand, eco-friendly packaging at lower cost, with unit cost accounting provided. Consider dedicated cost accounting systems to better track your variable costs of fulfillment.

Test This Best Practice: Isolate Shipping Costs by Zone
Parcel post rate card contracts with UPS, FedEx, DHL, Canada Post, etc. may be held directly by your company, they may be rate-shopped by your ship manifest software like ShipStation and EasyPost, or the contracts may be held and volume-discounted through your third-party logistics (3PL) partners. 

With the growing need for Amazon Prime-like doorstep experience, chances are you have enabled two or three separate fulfillment pathways each with a distinct rate card. The objective is to collect rate card data from each known data source, to account for variable shipping cost at the individual order level. Regardless of location, key to contribution margin analysis is capturing actual shipping cost per shipment and in turn, order.

Once you’re capturing variable shipping cost at the order level, it’s a simple segmentation exercise to quantify differences in shipping expense by delivery address and take steps to account for this variability by geo targeting and geo-optimizing your marketing campaigns. You can spend more acquiring orders with low fulfillment and delivery expense, AND orders with high profit dollars relative to fulfillment and delivery cost.

Test This Best Practice: Account for Value Added Services
Most consumer-direct brands offer some form of value added services between finished goods and customer doorstep. These might include licensing fees for your co-branded Star Wars pen, personalization expense to add a corporate logo or custom message to a pair of socks. Sometimes these services represent a loss leader or cost center, but with the right pricing model they can increase both AOV and contribution margin per order like intelligently priced expedited shipping fees. Understanding these variable costs and pricing model is key to understanding overall profit potential and the vectors for paid marketing campaign optimization. If custom engraving means more revenue AND profit, you’ll want to budget and allocate spend to campaigns that convert these services.

Leveling up your campaign optimization from ROAS and GMROAS metrics to true contribution profit per order requires granular and timely reporting of unit costs across marketing campaigns, value-added production workflows, and fulfillment and delivery. Sophisticated retail marketers incorporate these profit signals into their CMROAS calculations.

Next post we’ll explore how to incorporate unique customer identity and order history into your marketing ROI analysis, to accurately measure and account for acquisition and retention spend and performance, as we level up your ecommerce marketing to Level 4: New and Repeat Customer Engagement!

Turnkey Marketing Insights and Action with SoundCommerce

SoundCommerce helps consumer brands act and think like Amazon, and that means starting with the fundamental data at the core of the retail model. 

Our focus includes digital marketing as a key success driver, but not at the expense of operational conversion readiness (merchandising planning and supply chain concerns) and post-conversion shopper experience (doorstep fulfillment and customer service capabilities).

As we’ve extended the scope and reach of our data platform, our case studies show that consumer brands and retailers are still in the dark regarding where and how to best apply digital advertising dollars for maximum ROI.

SoundCommerce brings together real-time data at the unique source, medium, campaign, order and customer level to show you exactly where, how, and how much to spend to maximize profitable growth.

Contact SoundCommerce today to take charge of your data and accelerate your profitable growth!