Nov 14, 2023
Here’s what’s on my mind this week:
- The economic landscape
- Marketing is the only revenue center
- Setting a target MER
- Strategic Planning for 2024
Let’s dig in:
The Macroeconomic Outlook For 2024
As we step closer to 2024, the economic outlook for DTC brands is looking increasingly complex. With some economic indicators like, job cuts, and supply chain disruptions looking bleak while other metrics like slowing inflation, wage growth, and consumer spending still look strong, it’s hard to tell what 2024 will look like. So how is a DTC brand supposed to make a good strategic plan for next year?
First and foremost, it may be counterproductive to look at individual indicators such as inflation and unemployment rates, so instead let’s get a high-level view of what leading economists are projecting. According to the World Economic Forum, 61% of chief economists surveyed are anticipating a slowdown in 2024. Morgan Stanley warns of potential consumer spending constraints due to dwindling savings built up during the pandemic and the reinstatement of student loan payments, and the IMF and Federal Reserve project real GDP growth in the US to slow from 2.1% in 2023 to 1.5% in 2024. Finally, The Conference Board Economic Forecast for the US Economy expects “a very short and shallow recession” in 2024 citing flat growth in real disposable personal income, dwindling pandemic savings, and rising household debt as the cause.
Taken collectively, I think it’s safe to say we can’t expect much next year, and the first half may very well be brutal for some brands. As a fractional marketing executive, I know how heavy that can weigh on a CEO. It’s not just about the health of the company, it’s the livelihood of those we employ that’s on the line. But as a Fractional CMO, I also share that burden. When marketing is the only business function capable of generating revenue, it also becomes the primary business function responsible for keeping people employed. The responsibility is immense, as strategic missteps can significantly impact the lives of employees and the longevity of the business. Fortunately, a robust marketing strategy can steer a brand through economic uncertainty, turning challenges into opportunities for growth and engagement.
Marketing is a Revenue Center, Not a Cost Center
The tendency to view marketing as a cost center rather than a revenue generator is a common mistake among CEOs. Granted, given how much money marketing departments spend, it’s easy to think of them as money pits. That’s why it’s important to understand that perspective often leads to knee-jerk reactions like slashing marketing budgets and personnel during tough times. But the truth is marketing is the only business function that directly contributes to revenue generation, making it crucial, especially in challenging economic conditions. When the economy slips, the key is to spend profitably and eliminate waste rather than arbitrarily slash budgets to hit a CFO’s targets.
For instance, I admire Grove Collaborative’s CEO Jeff Yurcisin for his focus on profitability in the face of slowed growth. In Grove’s Q3 earning report, Jeff stated “The year-over-year and sequential declines are due to lower advertising spend resulting in fewer new customers as we made our aggressive push to profitability.” While I certainly wouldn’t be happy about my budget getting cut, Jeff clearly understood the impact it would have on customer acquisition and revenue. Moreover, I’m inclined to believe any cuts to their ad spend were primarily the elimination of wasted ad spend. A slowing economy is no time to be making big bets on new channels. Tidy things up and spend on what you know works. You might get fewer customers, but you’ll get them profitably and still have a sizeable customer base to lean into when the economy improves. So the question begs. How should a DTC brand approach 2024 and the delicate balance required in ad spend decisions?
Balancing MER with Profitability
While a brand’s tech stack certainly shouldn’t be overlooked when culling wasted spend, the biggest bang for the buck will almost always come from ad spend. Moreover, while ROAS is great for gaining insights into the effectiveness of each channel or campaign, it’s better to start with broad strokes. To do that, I suggest calculating a target Marketing Efficiency Ratio (tMER) based on profitability goals. MER, sometimes referred to as blended ROAS, measures the overall performance of marketing efforts, providing a broader view of how much revenue is generated for every dollar spent across all advertising channels. In that same vein, tMER is a simple way to understand how much revenue your advertising must generate to hit a desired net profit margin. The calculation is pretty straightforward:
1 / Net Profit Margin= tMER
For example, if your net profit margin is 15%, your tMER would be 1 / 0.15 = 6.6. In other words, for every dollar you spend on advertising, you need to generate $6.60 to stay at a 15% net profit margin. It’s worth noting we’re using net profit margin rather than gross margin. If you use gross margin in this calculation, it will tell you how much revenue your ad spend needs to generate to break even. Certainly, there’s some utility in that, but I would argue it’s better to have a target MER that reflects your bottom line rather than merely covering your COGS.
Of course, your target MER will also depend on various factors such as the product or service, industry, audience, etc. For brands with high net profit margins, a tMER of 3-4 might suffice, while those with lower margins may require a higher ROAS. CEOs, CFOs, and CMOs should work closely to determine these targets based on the company’s profit margin goals. Setting a tMER is the easiest and simplest way to start that conversation, and give yourself a benchmark when you look at ROAS for individual campaigns and channels. At the end of the day, the entire executive team should be in agreement that marketing efforts should contribute effectively to the bottom line.
Put it all Together for Strategic Planning
To the CEOs and marketing leaders gearing up for 2024: it’s time to make smart, profitable decisions about your ad spend. While we may need to tamper our expectations for revenue growth, there’s no reason why a DTC brand can’t be profitable next year. Trust and empower your teams to innovate and create campaigns that not only connect with your customers but also drive your business forward. And above all, remember marketing is not a cost center; it’s the heart of your revenue-generating efforts. If you have to pull back in 2024, approach it as a delicate balance between near-term profitability and long-term growth. Let’s navigate these challenging times together with strategies that are as resilient as they are effective.
