The Economics of Online Marketing

So a gift cataloger with a 50 percent average margin may select a 30 percent A/S for its ad efficiency target. A retailer with slimmer margins — say computers or electronics — would choose a lower A/S target.

If you sell products with widely differing margin structures, you may be wasting an opportunity if you apply a single A/S target to all your advertising efforts. Setting a single target may lead you to over-advertise your lower-margin products, while under-advertising your higher-margin products. To combat this, either fold actual margin data into your online marketing management process or apply different A/S targets at the product-category level.

Measure Sales

The denominator of the A/S ratio is sales dollars. But there’s more than one way to measure sales:

- Web demand sales measures sales as seen by your Web site.

- Booked sales measures sales that actually make it into your bank account (demand sales less frauds and cancels).

- Net sales reflects sales that actually stick (i.e., booked sales less returns).

These sales measures come bundled with various time lags, as frauds and returns take days and weeks to unfold.

For simplicity, most online retailers use Web demand sales —that is, sales as reported by the Web site — as a reasonable proxy for true sales. If the ratio of Web demand sales to booked sales is relatively constant during a period of time, track demand sales and use this ratio to accordingly adjust your financial models.

Sometimes this ratio isn’t consistent over time. For example, some online jewelry merchants experience large fluctuations in fraud attempts week to week. As frauds are detected after orders come through the Web site, they’re included in Web demand sales, making this measure less than accurate. In such cases, back out frauds from your Web demand sales.