This article is written by Leverage Lab CEO AnnMarie Wills
On nearly a daily basis, a marketer/financial buyer/paid media strategist or other concerned citizen of business will ask Leverage Lab the following question: “This first-party data stuff is a real investment…when will I see my return?” This is not only a valid question, but it cuts to the core of how many first-party data projects fail or at least struggle.
First-party data strategy covers a wide variety of use cases from personalizing customer experience, to offering improved product recommendations, to democratizing customer insights across the enterprise. Worthy causes all. But the fastest way to impact return on investment and deliver tangible benefits is to focus first-party data strategy on one of the largest operational costs for a business – paid digital advertising.
By organizing your first party data and directing your full effort only on paid media, the math can easily show the return on investment in short order. Let’s go through an example:
According to Schonfeld & Associates, who published a seminal study detailing the percentage of all sales spent on advertising by industry, the average percentage of total sales spent on advertising in 2022 is 2.78%. Some industries, like direct-to-consumer commerce, are considerably higher, at nearly 13%. Let’s use the DTC industry as an example.
Assume $100M in annual sales. Using our 13% average from the ad-to-sales ratio study, you spend $13M per year in advertising.
$100,000,000 (sales) X 13% = $13,000,000 annual ad spend
$100,000,000 (sales) / $13,000,000 (annual ad spend) = $7.69 return on ad spend
For a DTC company we are assuming the spend is focused on digital channels, however other business types may want to focus on the sales generated via digital and the spend in digital channels.
According to a variety of studies and our own benchmarks, we estimate that with first-party data strategy we can expect 150% improvement of return on advertising spend. The tactics here are focused on lookalike modeling of high value customers based on their interest, engagement, value, and channel preference. All are key data points available in a first party data infrastructure.
Here is where it gets interesting. If your current paid media channel spend of $13M is delivering $100M in sales then your return on advertising spend is $7.69. One dollar in advertising delivers $7.69 in sales benefit. A meaningful return to be sure.
But more is always better and in the world of first party data the immediate impacts around paid media can produce as much as 5X improvements. In Leverage Lab practice we see an average of 150% improvement in return on advertising spend when all paid media channels are informed by rich customer data, not just pixel based audiences.
With a 150% improvement on current ad-to-sales ratios, our one dollar in advertising spend can now net us $11.54 in sales value. If we turn that savings back into our advertising spend our budget jumps to $15.6M, which delivers $50M in additional revenue.
Below is a summary of the math and a sample guide to follow. Often when we do this exercise with a prospective client, it is clear that the opportunity far outweighs the investments which are a fraction of the increased revenue production. However there can be a sense of disbelief that this is possible. It’s understandable. The change from what has been the norm for the past 20 years of programmatic advertising, to something seemingly so new and revolutionary can create this level of distrust. However as more and more companies fully adopt this people-led media planning strategy1, the more we will consider this type of return the norm.
|Percentage of Sales From Online Sources||100.00%|
|Total Adjusted Revenue||$100,000,000.00|
|Ad to Sales Ratio||13.00%|
|Expected Advertising Budget||$13,000,000.00|
|ROAS DOV Update (+150%)||$11.54|
|Net Increased Revenue Production||$50,000,000.00|
It takes far less time than you might think to be technically and organizationally able to focus on using first-party data in paid media. This is not a year long or multi-year project. Campaigns can be up and running in fewer than three months with the right infrastructure and methodology.
- Lai, N. (2022, August 10). [web log]. Retrieved from https://www.forrester.com/blogs/performance-marketing-is-underperforming/.