Eli5 How does a huge sum of a company’s money used for marketing really help in the long run?

27 views

Eli5 How does a huge sum of a company’s money used for marketing really help in the long run?

In: 16

Think of it this way, if you don’t know about a product or service, you’ll never buy it. Marketing is about making someone want to buy something and part of that is awareness. This is expensive and a company can use a variety of advertising methods, cold calling, web ads, tv ads, letter drops ect

Helps with money.

But you’ve got 2 different types. Brand marketing / corporate branding vs marketing. Brand marketing is meant to raise brand awareness and doesn’t directly make money. It’s not easy to quantify the results of return on spending and many companies spend very little. But it’s proven to work in the consumer facing goods space. When people are at the store and they need to buy a product, like say laundry detergent, people typically gravitate towards brands they have heard of before like Tide over brands they have not heard of like “Unkle Joe’s Washin’ Suds”. Having heard of it before builds trust in the mind of the buyer.

The other non-brand marketing is about quantifiable means of return on spending. Loyalty programs, mailers, discounts, campaigns, cold calls, mailing lists, infomercials, anything targetted and therefore more quantifiable.

Long run, the company that most effectively uses their marketing will grow quicker and have a better chance of raising capital, and becoming bigger and bigger until it rules us all. And in the end, that’s the ultimate goal of everything in life…

Why do people pick up Coke or Pepsi rather than cheaper other brands in the shop? For the most part they probably haven’t done carefully blind tasting comparisons and concluded that they prefer the expensive options; they just grab something the recognise. Why do they recognise it? Because those brands have spent fortunes on marketing over the years.

If you found a vending machine that spat out $4 every time you put a dollar in it, you’d “spend” a lot of money at that vending machine. Same goes for marketing. Companies have a “return on ad spend” (ROAS) metric for each channel.

So a company like Home Depot might have a running ROAS of 4x via Google Ads. Meaning every dollar they spend on Google Ads returns about $4 in customers buying stuff. If your goal is to make money, you could see the logic in spending every dollar possible on buying those ads.

I work in performance marketing – and I like to say that if I can’t prove I’m making you money, and more money than what you’re spending on marketing + me + expenses, fire me.

I’ll sit down and figure out what data needs to be tracked to prove ROI (return on investment). Then we’ll make what’s called a funnel, which is a triangle graph that shows the percentage of people we lose at each step of the marketing process until it becomes a ‘conversion’ or sale.

For one client it would take around $1,500 of marketing and 100 ‘leads’ (filling out an information request form) to generate a sale. But as long as it was under $2,000 per sale averaged across a whole year it was profitable.

The real key to all marketing though is understanding you can’t market pure shit. I can’t sell a stick. I mean unless it’s firewood, then I suppose I could. Point being *someone* has to want it. And you would be extremely surprised at all the weird shit people want…

There are lots of reasons to advertise on the expensive side. Introducing excitement about a new product from a trusted company for example would be something that would show direct returns on marketing. If the ad is good and the product is good, you can get 1,000% returns on an ad.

Another reason is just branding. This done for the pure purpose of telling people/reminding people that you exist. This does not show direct returns but will be to your benefit later when someone sees a targeted ad. They’ll remember who you are or, at least, remember your name.

Sometimes, it’s just adds for investors. Like an ad for Bio-Techne in the back of a Science magazine. Do consumers really need to buy the best animal free e-coli protein derivations? Do you really need a bucket of IGF-3 made from the finest e-coli? They also have plenty of stuff produced using goat blood if you need it. There’s also human tissue lines. That is targeting like 50 people across the entire world that might care to invest in the company or form a partnership. Maybe the ads just there to let people know that they changed the corporate name that the operate under back to the old name. Again, no proof of ROI, but necessary.

Then there’s stupid advertising that wastes huge amounts of money. Example, participating in a tradeshow focused on washers and dryers and you own a cosmetics company. I’m sure you’ve seen that at tradeshows if you attend them.. That’s a $30,000 booth fee +staffing for a weekend that you’ll never get back. $30,000 may seem like a tiny amount, but do that 30 times a year you start to get into walking around money. Plus your direct mail campaign for a service that costs, on average $1,000 targeted to a poor area of town. Anything coupons are also terrible. Ads for things that everyone already buys. Are you really going to switch toilet paper brands by the time you’re in your 40’s? Pretty sure if you like Scott, you’re sticking with Scott at this point. All the stupid ads add up way quicker than you think. Yes, you have advertising saturation but that’s a two edge sword. Yes, everyone knows who you are. Yes, they know hate you because they can’t stand your terrible ads.

There’s a lot of difference in nuance depending on the nature of the company, the product, the industry, and the kind of marketing, but the general gist is: you bank on the idea that you’ll eventually make more money in sales than you spent on advertising.

If your company is growing, or branching out, then the marketing is usually meant to attract new customers (or alert existing customers to new products). If a company already dominates a marketplace with no more room left for growth, then marketing is more like an operating cost (like rent or electricity or stationary) that you have to pay to maintain market share and prevent other companies from eating away at it.

So, for one small example, the company I work for sells a narrow range of super complicated machines to a very niche industry. The industry is quite small, staff move around within it a lot, and facilities tend to have very byzantine procedures for approving purchases of capital equipment. So when a buyer needs to buy a new machine, we know the first thing they’ll do is call someone they’ve worked with before, and failing that, they’ll check who made the machines they have now and call that company first. If we can be either one of those, we have an in. If we’re both, then it’s basically a guaranteed sale.

So we spend enormous amounts of time, energy (and money) to break into discrete units of the industry (facilities, companies, buying groups, outsourced service groups, etc) because we know that every single sale winds up being an advertisement for further sales for years and years.

My brother and I met two guys (also brothers) at a NASCAR race who own a popular car battery company. They said they had invested $24M of sponsorship money in NASCAR that year and made their money back in 6 months.