The Secret to Smarter Budget Allocation

[00:00:00] Richard Gaffin: Hey folks, welcome back to the e commerce playbook podcast. I'm your host, Richard Gaffin, Director of Digital Product Strategy here at Common Thread Collective. And I'm joined today by Luke Austin, who is now our VP of Growth here at CTC. So congrats Luke. But Luke has been our frontline reporter the last few months here, or rather the last year really coming in and kind of letting us know exactly like what's going down.

With people or, or with our experiences on the client side. So we can bring some of those insights back to you. But today the topic of conversation is incrementality not just in general, but also some specific ways that we at CTC are putting things in place to make measuring incrementality a little bit more effective for our clients.

And so, what, well, actually, you know what I said, all this stuff, but Luke, how are you doing today?

[00:00:45] Luke Austin: I'm doing, I'm doing great. We're, partway into Q3, already dialing in Q4 strategy, talking about incrementality. Yeah,

it's a great combination of things going on

[00:00:56] Richard Gaffin: Exactly Great time to be alive All right Well let's let's dive into it here So I have in front of me three Specific questions that we kind of ask ourselves incrementality so I'll I'll read them off right now like maybe let me frame it this way So um there this is how this is how we kind of framed it when we're talking about it internally when we're talking about it to a client to clients There are three questions at the center of creating a predictable profitable e commerce growth plan And those three questions are one what should my total budget be to maximize profitability within my desired time window Two how should that budget be allocated across channels for the most incremental income or outcome rather And three what is the campaign level media plan and expected profit outcome for every single day So Luke walk us through those questions maybe generally how you came to those three and then how we are sort of addressing each one

[00:01:49] Luke Austin: Yeah So this kind of gives us a framework for thinking about how incrementality fits into our system at CTC into the tools that we've built out and how we operationalize against it And so for those three questions um uh if you're familiar with what we're doing here at CTC we have answers to question one and three very clearly through um Uh the spin a mirror model and then our core tools the growth map and stat list So for question one what should my total budget be to maximize profitability within my time The desired time window the spin a mirror model gives us the answer to that which is what is the optimal budget allocation against my business objective maximizing contribution margin I'm on order one maximum is maximizing contribution margin Against a specific LTV time window or maximizing new customer revenue at breakeven contribution margin And then we have some other optimizations but those are the main three that the spending model tells us What should the total budget investment be to to be able to hit that desired business objective

And then if we skip over the question two which we'll come back to this brain fatality fits in but skip that over that question to question three what is the campaign level media plan and expected profit outcome for every single day That's where the growth map and stat list come in So we have daily targets for every single campaign on every platform that letter up to the total budget investment and the ROAS targets is based on Our goal to AMER based on the business objective we have targets set on a daily campaign level that can be tracked against on a daily basis and and operate against within our teams So question 2 is really the bridge between question 1 and 3 which is how should my budget be How should that total budget allocation from the spin AMER model output How should that be allocated across specific channels and tactics For the most incremental outcome or said more specifically if my optimal budget allocation is 530 000 for this month based on my desired business objective Which platforms and then which tactics within those platforms should that budget be allocated to How much should I be giving to meta acquisition to meta retention to Google branded search to PMAX to non brand search to being um uh down the line for all our core channels and then the core tactics or campaign types within those channels So we have been working on getting more clarity to have And more effective answer and output for question two which is the optimal budget allocation across those channels to be able to then execute against on a daily basis So that is really where incrementally fits in in terms of our system and those three core questions that any profitable e commerce growth plan is is trying to answer And I think it's worth mentioning as well that we haven't seen a system or a service that offers answers to each of these three questions all in one

place

The Budget allocation total on a channel level and then the media plan and operational tool on a daily basis being all within one place is crucial to have and based on the many brands agencies products that we interact with haven't seen these all come together in one place which is crucial that they that they do

[00:05:10] Richard Gaffin: Totally so actually let's let's quickly take a step back here because I realize we don't we don't really do this on this podcast as much as we should but can you define incrementality for us Luke

[00:05:19] Luke Austin: Yeah so

[00:05:21] Richard Gaffin: um

[00:05:23] Luke Austin: conversations around incrementality A couple of years ago attribution really was the was the buzzword that's

Anecdotally less use of attribution in everyday language now across e commerce growth um uh growth agencies brand operators marketers and more use of incrementality it's being used all the time now And so I think

there's several different ways that you could define it but how we like to think about incrementality Is that incrementality is a percentage What we're getting at is a percentage number So not an abstract idea What we're trying to get to is incrementality is a percentage

And specifically that percentage is

applied against the channel attributed revenue and ROAS So to give a very specific example we are wanting to find out the Incrementality of meta acquisition campaigns a new customer

focus

campaigns not going after returning customers Okay Meta on platform seven day click is reporting a let's call it a 2 2 seven day click Roths for a meta acquisition What we're trying to get to is what is the incrementality percentage for meta acquisition that we should apply against that 2 2 that gives the true read of the incremental impact of that So

we can

talk we'll dig more into incrementality testing geo holdout inverse holdout like the actual methodology but we're measuring against Shopify sales and the impact on Shopify sales Thanks Bye What the true ROAS of our meta acquisition efforts are

And then what that tells us is let's say we run it and it comes back that meta acquisition is a 2 5 incremental ROAS So based on the the the reads of the geo holdout or inverse holdout test through an incrementality study we're able to see the true incremental ROAS of Meta is a 2 5 So 2 click 2 5 output of the incrementality test So what that means is that our incrementality percentage is 13 6 4

That is what we're after And incrementality is for our core channels and tactics Understanding the percentage incrementality that we can apply against the on platform attributed revenue And ROAS

because that helps

us to set what the necessary targets are for those channels to operate against the necessary ROAS targets as well as the budget allocation on a channel level basis

because we have clarity on

what the true contribution from those channels are

[00:07:47] Richard Gaffin: okay So In this case then cause there's kind of a lot to tease out but like so incrementality generally speaking as I understand it it's like if you spend you're already spending a hundred thousand bucks on meta per month or something like that And if you were to grow that to 110 000 what would the ROAS on that additional 10 000 be so if that's like a general definition of incrementality then So in what how does the how does the percentage apply then So let's you have a 2 2 ROAS reported on Meta and

[00:08:18] Luke Austin: Yep

[00:08:20] Richard Gaffin: so what are you determining that 2 5 ROAS is determined on a specific amount of like the amount of spend that we we grew total spend by last month the incrementality on that particular I don't know transcript spend or whatever you would want to call a 2

[00:08:36] Luke Austin: Yep So in order to back into the incrementality percentages for each of your channel or tactics you can do that through a few different ways of structured tests The main three are A geo holdout an inverse holdout or a scale test that the one you're bringing up as a as an example is more scale test which is this is our normal budget allocation within this channel We're going to test scaling an additional X amount of dollars into this channel and see what the impact is But when we're just trying to define the current incrementality the current contribution of our channels what is what is meta acquisition actually contributing in terms of revenue and the true ROAS against the spend an inverse holdout is usually the best structure for for one of these tests for an existing channel that you're running when an inverse holdout is is You look at your revenue contribution on a state region or DMA level for your specific store in most cases if it's a U S based store you're looking on a state level and then based on the analysis there's uh uh you identify a group of states that the how the revenue moves in that group of states is indicative of how or predictive of how your overall revenue moves So let's say Arizona California and Kentucky is a subset of three is identified that how the revenue moves and fluctuates in those states correlates very strongly is predictive of your overall revenue in your store So what you can infer by that is What the change in revenue that you see in that subset of states you can expect that on your broader on your broader sales So with an inverse holdout then first step is identifying is the market selection which is critically important And then once the markets are selected you exclude those markets from your ad campaigns and you'd spend no media within in this example meta acquisition within Arizona California and Kentucky for a defined period of time based on the conversion volume And you see when I excluded that media from that subset of locations what was the actual revenue impact in my Shopify store to Arizona California and Kentucky And you're able to see

when

I withheld spend this is the revenue the true revenue impact of withholding spend If you withheld spend in those from a certain channel or tactic and saw Very little revenue impact than the incrementality is going to get closer and closer to zero because withholding spin did Did very little in terms of affecting your overall sales if you withheld this spend and you saw what that's what you're trying to tease out What is the relationship to my true overall revenue of of withholding that spend so That's how you assess it for an existing channel That's the first step of what we're trying to get to is my core existing channels and tactics What is the actual incremental contribution or the actual the percentage incrementality based on in most cases an inverse geo holdout test If it's an existing channel if it's a new channel in most cases geo holdout will be a better better structure but a similar similar idea

[00:11:35] Richard Gaffin: Gotcha Interesting Okay So so in this sense then like it sounds like when we talk about incremental incrementality it relates to let's say budget allocation across channels what we're sort of talking about is less About well the way I was thinking about it before which is like increment increasing spend in increments as much as it is what like an attribution almost synonymous with attribution in a sense But of course there's the idea of like if you if you increase incrementally on this channel you to increase incrementally on another one as well or or on a different one rather but does that is that in the ballpark

[00:12:15] Luke Austin: Yes Yeah You're You're you're trying to tease out you're trying to understand what the what the actual impact on your Shopify sales either total

sales or new

customer sales in most cases is of that spend And then you you basically just create so the incremental ROAS is just the Incremental sales from that tactic right So when we

withheld

that what is that It's the incremental sales from that tactic against the spend in that tactic And that's your true incremental ROAS from that channel So we saw great withheld those states We ran the study the true increment incremental impact of med acquisition is a 2.5 So that is my incremental roas The incrementality percentage is um uh what did we say point is like 114% just under 113.6% somewhere on there That gets applied against your on platform ROAS

[00:13:05] Richard Gaffin: Gotcha

[00:13:06] Luke Austin: And why and why this is so critical is because we we don't tend to see that incremental ROAS and incrementality percentages per channel are within a small margin of error We actually see really wide distinctions I'll give I think one of the biggest the biggest uh Uh ones that we tease out first is performance max versus your meta channel or your meta acquisition And in many cases depending on the setup of the structure of both the meta and PMAX campaigns but if we're doing meta campaigns optimized for click only excluding the attribution excluding existing customers a healthy setup on the meta side versus sort of a general PMAX structure Then what we tend to see is that PMAX book can land in the in the range of 30 to 50 percent incremental Now it's going to range um for for many brands but meta click only click only set up excluding past customers We tend to see it's at least a hundred percent or more incremental in most cases which means what Facebook is attribute what Facebook is claiming on platform for the click only attributed ROASP Usually the incremental ROAS is just as high if not higher than that So that's the example we talked about 2 5 incremental ROAS versus 2 2 That would be a that would make a lot of sense for for a number of brands as the outcome for PMAX If it's 30 to 50 percent incremental let's call it 35 percent on platform I'm getting a seven ROAS on my PMAX campaign for example Fantastic That seems really strong We should push more dollars in there Cause we're getting a seven on our PMAX versus a 2 2 on our Google click only Well actually not because you take that seven you multiply it by the 35 it's a 2 45 ROAS versus meta The incremental ROAS 5 So actually this is wherever our budget allocation is right now It's probably in a healthy place based on that incremental read We should not be running Pmax at a 2 5 and meta also at a 2 5 because the incremental impact of those channels is really disparate

[00:15:05] Richard Gaffin: Gotcha Interesting Yeah So this is this is essentially a method for assessing the accuracy of in platform reporting I guess Um so let's talk about so you'd mentioned before that we had had the answers to question one and three answered question two is sort of the bridge that we didn't necessarily have the tool for before but it sounds like we do now so tell us a little bit about or why we're able to answer two at this point

[00:15:33] Luke Austin: Yeah so um uh we have a partnership with measured which is a platform that I'm sure many folks listening and have heard of or use themselves we've worked with measured with a number of our clients historically on different projects What we've seen is Measured's platform is it is is great I think it's it's probably best in class in terms of what they're offering for folks who are wanting to understand the incremental impact of their channels as well as the optimal budget allocation on a channel level So um uh we formed a partnership with measured to be able to um uh combine CTC's core services alongside what measured is offering in their platform to be able to answer each of these questions for brands in a way that I don't think there's a service or platform out there that's able to offer all of that in in one place together cohesively in a strategy

um

measures measures platform Um uh I think there's a couple a couple of things that stand out for them One is that everything they have pulled into their dashboard connects to all the app platforms So you can see Facebook Google P max being you can have everything connected You can see on platform spend revenue Ross and then you can see your incrementality percentages your incremental Ross your incremental orders incremental sales per channel So the dashboard View is really intuitive and super helpful measured also has a budget optimizer tool which takes into account some of the scaling effects which is something you brought up

earlier

which is as you increase you decrease spend on certain channels the rate at which the the efficiency diminishes is going to change right Like If you increase spend on brand search by 20 you're likely going to see a big bigger drop off in efficiency than on than on meta there's just different ceilings for different platforms and so their budget optimizer tool takes into account the utility as well as the scale factors and other things to help spit out Hey here's my optimal total budget allocation What's my optimal budget allocation per channel B So their budget optimizer tool is really helpful and they can track along that within their dashboard So The platform is really dialed in and they have a group of folks there that have done this for a number of brand and have a lot of experience running these running these tests So in partnership with measured we're we're able to offer a solution for each of these three questions for brands in a way that I think is best in class as it relates to each of these questions It's been a mirror model Measures platform for incrementality testing and then the growth map and statless are core tools for the operational day to day execution and target setting against against each of the platforms and campaigns

[00:18:05] Richard Gaffin: Yeah and and I should mention too at this point that I'm not sure exactly when this pod is coming out but for a limited time we are offering to include measured at no additional cost when you become a client with us to sort of include that element able to answer those 3 questions for you consistently and to make sure that you're spending less money Your budget where it needs to be spent okay So I mean this is this is great Luke was another episode of Luke explains incrementality to Richard I appreciate it but is there anything else you want to hit on this Anything else you kind of want to pull out for our audience

[00:18:37] Luke Austin: I think the last thing that could be helpful we gave an example of the difference between meta and performance max but just for people to understand like okay what is the what is the actual impact of working with an incrementality tool Like measure what is the What is the potential outcome you could see And so I could speak to that very quickly as well Just a couple examples from our client stack So One of our brands that we've we've worked with before really leveraging incrementality testing through measured specifically was spending closer to 40 to 45 percent of their total budget on meta Let's call it 25 percent of the budget on performance max maybe another 20 percent on branded search And then other platforms mixed in there just to sort of a rough rough mix what we saw as an outcome from incrementality testing is that the true contribution from performance max was much lower than we expected Like I said closer to the 30 35 percent range Meta increment incremental impact was close to 150 percent plus depending on the time of year and campaign type we were running and then brand search was I would say probably as low as we expected So there weren't major changes there but what the outcome has been of working with this tool in connection with this client is we're spending closer to 65 percent of our budget on meta and have lowered lowered investment in other channels as a result which has helped to drive new customer acquisition much more efficiently than than before So I think it's sort of double clicking on There there's a very real impact for how you assess the efficiency of your channels and then the budget allocation across these channels

That likely if a brand hasn't engaged in this before is going to be there's going to be a much wider variance in how you look at the budget allocation and approach that than um having having done it prior and so we have examples like that across other brands as well where going for a seven row on Pmax versus a 2 5 on Meta may seem like we're leaving money on the table on a certain campaign type Where in reality that's likely what a brand should be doing in terms of that relationship based on the incrementality we tend to see from those two core channels So there's likely big big impact for most brands in engaging in this not we're not talking you know 10 percent swings in either direction which is still impactful it's likely going to be wider than that Yeah

[00:21:00] Richard Gaffin: people and I think anybody who's managing budget or who's managing marketing across e commerce has this question of like am I wasting my money Where I'm spending it And I think what what this is sort of these studies have revealed is that there are big or there there's like wide swaths of budget that are kind of being wasted and the reasons they're being wasted are basically hidden to you Unless you can use a tool like this to reveal that and discover I mean and there there could be just account changing ramifications for being able to for being able to reveal or get the clarity that you need on those things

[00:21:35] Luke Austin: Yeah that's right

And

pair that with the spend a mirror model which we've we've talked about this before but the output of the spend a mirror model for the majority of brands that we work with is a very different budget allocation recommendation than those brands have historically or recently been engaging in Um uh we're not talking 10 percent swings in most cases It's it's it's a much wider swing than that depending on the business objective So the spend a mirror model paired with Incrementality and then paired with how we execute on a daily basis on a campaign level within a CTC structure is potentially a night and day difference for many brands in terms of how they are approaching their overall budget allocation, how they're allocating to channels and then how they're executing on a basis. It's going to be very different in most cases than what's, what has historically been. Been true, which is, which is exciting. There's a lot of opportunity for, for many brands when it comes to diving into each of these three questions and getting clarity for themselves. Just

specifically 

[00:22:32] Richard Gaffin: Awesome. Yeah. Well, like I was mentioning before, if you're looking for that clarity, common thread, co. com, hit the IRS button. Let us know that you're interested in moving forward with something like this. All right. Well, Luke, as always, thank you so much for bringing your wisdom in here from the front lines.

We always appreciate it. And for everyone listening, we will see you all next week. Take care.