If I promised to give you a $10 bill in exchange for every $5 bill you handed me, would you end the transaction with the number of $5 bills you have in your wallet? Heck no. You would RUN to the nearest ATM, while rabidly calling your rich uncle, Manny, begging for cash.

Jonathan Shapiro, CEO of MediaWhiz, recently published an article in iMedia titled Death of the marketing budget in which he eloquently updated the case for the role of performance marketing in the budgeting and planning process. As he states, “For the right advertisers, the internet offers numerous ways to create demonstrable and predictable ROI from one’s marketing efforts”. A combination of search, display, email, co-registration, and affiliate marketing tools, applied with the appropriate conversion characteristics, lay the groundwork for a measured approach to wringing the last profitable dollar from your target market.

NUTS AND BOLTS
To take advantage of this powerful concept an advertiser needs to know some fundamental information. For example:

• Search. What is the profitability of each sale and the conversion rate from click to sale? That data provides the value of each search click. Based on that information, one would buy clicks as long as the cost is less than the value of each click.

• Email marketing. If the marketer purchases emails on a Cost Per Action basis, and understands the likelihood of that action turning into a sale, then the marketer is guaranteed a positive ROI for each completed action that costs less than the CPA.

Based on those two examples, it’s clear that a smart business person would invest as much as she could as long as the profit objectives are being met. And that investment number is probably a lot higher than a traditionally-developed marketing budget.

Digging a little deeper, it’s important to note that there are other aspects of managing a campaign across a portfolio of media types which must be taken into account:

• Developing creative for all consumer touch points that drive conversion.
• Responding rapidly to initial interest. As Shapiro notes, an MIT study showed that responding to consumer interest within five minutes versus the following day increases conversion 100-fold.
• Continuously optimizing media, creative, target segments, and the sales process.

IMPLICATIONS
The ability for marketers to optimize profitability makes the concept of a fixed marketing budget obsolete. That said, it’s clear that for many companies, potential changes in the budgeting process, organizational structure, and even training of marketing managers, represent challenges.

In the end, however, a company that does not provide the tools and support for marketers to manage an integrated portfolio of marketing programs is leaving money and market share on the table. The winners will be those organizations that embrace performance marketing and continuous improvement to generate demonstrable profits.