Small and medium-sized businesses are notoriously conservative spenders. Team members need to wear multiple hats, budgets are tight, and product development is the first priority.
But when it comes time to scale, most small business leaders want to move through traditional channels: If we can get into Target, they think, we’ll have made a name for ourselves.
Few jump into SEM, worrying it’ll be too expensive for a cash-strapped company. Even back-of-the-napkin math, though, shows that’s not true. While most search engine marketing (SEM) agencies ask for $10,000 a month in ad spend (plus a 15 percent to 20 percent management fee or fixed management fees), every dime of ad buying works to spur sales, build brand awareness, and generate ROI after one cycle. And, in many cases, that investment drives sales at better margins than a brick-and-mortar arrangement ever could.
SEM by the Numbers
Let’s first consider the in-store route. Companies like Macy’s use what’s called the “keystone” markup, meaning retailers charge approximately twice what they pay for a product.
So, for example, if you produce a T-shirt for $12.50, you might charge Macy’s $25. Macy’s then prices the shirt at $50. You get $12.50 in profit for any shirt Macy’s sells. You might ship 800 shirts to a retailer, which means you’re out $10,000 in inventory, plus shipping costs.
Now, let’s consider SEM. Results vary wildly by industry and brand, but cost per thousand impressions (CPM) rates are around $6.27, and click-through rates (CTRs) are around 1.56 percent. At a standard CPM and CTR, you’re paying about $0.40 per click. Assuming a 1.5 percent conversion rate, it’ll cost you $26 to sell a $50 T-shirt, which nets you $24 in profit per shirt. That’s nearly double the profit gained through a retailer.
More Than Margins
Doubled profit margins should be plenty to get your attention. But that’s not all SEM has to offer.
When a customer buys from you directly, you don’t need to make the product until it’s been purchased, improving cash flow. You also own the customer relationship, opening the door to retargeting and email outreach for repeat sales. With SEM, brand control remains in your hands, so a third party like Macy’s can’t dictate your pricing and product positioning.
But it isn’t just product companies that can use SEM to boost online sales. Software-as-a-Service (SaaS) businesses, too, can enjoy boosted margins and increased brand ownership. App marketplaces like iTunes take about 30 percent of sales, so direct-to-consumer sales puts 30 cents of every revenue dollar back into SaaS entrepreneurs’ pockets.
The SEM Snowball
Done well, SEM builds on itself. More site traffic leads to a higher ranking in organic search, which equals more sales, which equals more brand awareness, which equals – you guessed it – more site traffic. Profits and margins keep rising, while marketing costs shrink as you improve in three critical areas: testing, segmenting, and email outreach.
1. A/B test relentlessly.
A/B testing involves testing multiple hypotheses against one another to compare results. Google, arguably the largest SaaS company on the planet, tests religiously, according to former Google executive Tomasz Tunguz. Tunguz says the tech titan routinely realizes 5 percent revenue improvements through A/B testing. At Google’s scale, 5 percent is a big deal. Test everything and anything on your site. Swap in different copy, images, and testimonials. Try a fresh color on your landing page, and move applications around to test users’ reactions. PPC raised conversions by 50 percent simply by changing the location of a form on a landing page. Just be sure to run tests for standard periods of time to get “apple to apple” results for fair comparison. My sources tell me that Everlane increased sales by more than 10 percent by just adding its “quick add” option.
2. Segment your shoppers.
Online shoppers expect you to know them and give them what they want, when they want it. Learn as much as possible about your customers, segment accordingly, and follow up based on their behavior.
In a recent study, marketing SaaS provider HubSpot found that 39 percent of marketers said segmented email lists improved open rates, 28 percent reduced unsubscribe rates, and 24 percent experienced better sales. SaaS email platform Vero saw segmentation boost conversions by a whopping 450 percent.
Send an incentive coupon to a customer that purchased once but didn’t return for 30 days. Give frequent buyers special offers, letting them know you appreciate their business. You’ll build relationships with your best customers to boost sales — something you can’t do through a third-party retailer like Macy’s.
3. Capture email addresses at every turn.
Email still works. “Out of all the channels I tested as a marketer, email continually outperforms most of them,” says marketing guru Neal Patel, co-founder of Kissmetrics, CrazyEgg, and QuickSprout.
Keep your email list growing, and you’ll keep your brand growing, too. It’s no coincidence that many of today’s top digital marketing brands have built enormous email lists. HubSpot amassed one of the industry’s biggest lists, subscriber by subscriber.
AppSumo founder Noah Kagan built his email list to 700,000 contacts. These lists are gold mines for repeat business, and they keep traffic high as recipients click through to your site.
Traditional channels may have a lower upfront cost, but they also take 30 percent to 50 percent from your sales. Why put up with that? In what other situation would you allow someone else to skim nearly half your profits? With SEM, you can double your profits, improve cash flow, own your customers (in a good way!), and keep your brand under wraps. SEM services aren’t cheap for young companies, but then again, nothing with proven ROI is.