U.S. retailers are leaving $5 billion in revenue on the table
When I talk to marketing executives of large online retailers, I ask a lot of questions about revenue and budgets to get to the bottom of how they can measure they’re advertising more efficiently.
The following bits of dialogue are from a conversation I recently had with a top U.S. ecommerce retailer:
So what’s your top line revenue? $2 billion.
What’s your digital ad spend? 10% of revenue, so $200 million.
The next question usually stumps them.
How much of the $2 billion in revenue is caused directly by the $200 million in digital ad spend? Hmm, not sure about that.
Do you measure incrementality on your $200 million digital spend? Can you clarify that question?
Do you calculate the change in revenue you see from serving ads versus what you would have seen had you not shown ads? Um, no.
What percentage of that $200 million in digital is used to target recent site visitors? I don’t know.
I’m often shocked by the lack of knowledge retailers have on what actions their consumers take on their sites. When a consumer visits a website, a brand has a golden opportunity to identify and then re-engage with them using retargeting.
Incrementality can generate an extra $60 million in revenue for a single retailer. This can mean the difference between a profitable quarter and an unprofitable one.
On most retail sites, there’s enough consumer data to predict with a 90% degree of accuracy if consumers are going to purchase. Once users come to a site, retailers owe it to themselves to understand user behavior in order to pull them down the sales funnel with subsequent ad spend and marketing efforts.
My questions continue.
Of the $200 million digital ad spend, how much is going to retargeting? About $30 million between Facebook, Google and our retargeting provider.
Given that you’re spending $30 million on retargeting, what amount of net-new revenue do you see from that? We don’t know exactly.
Based on industry averages, I presumed they’re getting a 300% return of incremental revenue. So they’re spending $30 million on retargeting to get $90 million in revenue from it. Many incumbent retargeting providers will claim 500% returns, but this is not based off of incremental revenue. They optimize media spend toward users with the highest organic conversion rates and then take credit for those purchases via last click attribution. This artificially inflates the impact of their returns and wastes money on users who are predisposed to purchase.
I also know from experience that if a company is getting a 3X ROAS (return on ad spend) using a retargeting provider that’s not optimizing toward incrementality, they’re leaving tens of millions of dollars on the table.
Incrementality the key to increasing net-new revenue
With a conversion-based attribution model, the algorithm — and therefore the vendor — gets credit for touches (clicks) from consumers who convert so it will naturally only show ads to people who buy frequently.
On the other hand, incrementality measures the consumers who do need to be served an ad to influence their purchase decision. It does this by calculating the difference in revenue between two groups: those assigned to a retargeting treatment group (who see ads) versus those in a holdout group (who do not see ads).
Incrementality helps uncover the value of spending less on the top 10% of purchasers and spending more on the other 90%. You hold back on showing ads to users who’ve proven to be frequent purchasers, and replace them with less-expensive-to-acquire users who aren’t ready to purchase just yet but have been predicted to be influenced by ads through the use of machine learning algorithms that monitor behavioral data such as how many add to carts, site visits and purchases they’ve had over time.
2017 U.S. retail digital ad spend*
2017 U.S. retail retargeting ad spend*
Net-new revenue U.S. retailers are leaving on the table by not optimizing for incrementality
These “long tail” users are the key to increasing ROAS but targeting them can’t be justified in a conversion-based attribution model that only cares about consumers with high purchase rates.
The financial hit
So to my aforementioned online retailer, I can confidently say (and did say) that replacing an attribution model run by a retargeting provider with an incrementality model run with in-house tools will generate an additional 2x return on top of the existing 3x return. If they’re now getting $90 million on a $30 million retargeting budget, optimizing for incrementality will get them $150 million for the same ad spend.
That’s right, incrementality can generate an extra $60 million in revenue for this single retailer. This can mean the difference between a profitable quarter and an unprofitable one.
And that’s just one company. Total U.S. retail digital ad spend in 2017 was $18.2 billion and about 14% of that was spent on retargeting, according to eMarketer research. That means a little over $2.5 billion is being spent on retargeting from just U.S. retailers. If all of them moved to incrementality, that would mean an additional $5 billion in net-new revenue. That’s a lot of money left on a lot of tables.
*According to eMarketer research