When to escalate marketing spend

The cohorts you acquire fall into one of two buckets: profitable or unprofitable. Defining triggers for increasing marketing spend creates a framework for managing marketing budget expectations.

Profitable campaigns

Somewhat of a no-brainer, but when scaling isn't a motivator (i.e. for certain lifestyle business models) it's not as obvious. If the cohorts you acquire are EBITDA contribution positive at the gross margin level, you can increase marketing spend and expect to generate more revenue.

However, as with most good things the law of diminishing returns suggests that your cohorts will become less profitable as you saturate the available market and begin outreach to less profitable visitors. Carefully monitor your marketing spend expansion, even for cohorts that are profitable as their visitor composition is likely to change over time.

Unprofitable campaigns

There are instances when your campaigns aren't profitable but you actively increase marketing spend either by choice or by market forces. You should have a very clear strategy as to how you will eventually monetize these unprofitable cohorts, as your overheads will likely bankrupt your business by spending too much on scaling of unprofitable visitors.

Here are a few strategies that justify increasing unprofitable marketing spend:

• You are testing new acquisition mediums & channels
• You are testing nascent demand curves for complementary products to your core offering
• The competitive environment requires you to increase spend, and by not doing so you'd lose market share
• You want to "own the market" and prevent competitors from having any access to the market customer base
• Your acquisition strategy is split in such a way that you feel confident in your ability to improve your cohort conversion rates towards profitability in the future

All of these strategies need to be monitored very carefully, as you will be acquiring cohorts that do not contribute to their threshold of overhead expenses. However, many business models' market valuation depends on a significant proportion of "intangible" and "unquantifiable" assets that have other intrinsic value metrics associated with them. These companies are often acquisition targets to larger organizations or different subsets of synergy investors.

Implications of escalating marketing spend

This is important, though basic. All else constant, when you increase the amount of cash spent on marketing you achieve three things:

1. Your acquisition efforts are given the opportunity to scale faster. Assuming you have the opportunity to acquire visits of the same quality, you'll be growing the size of the cohort from that particular acquisition source. As long as you are funneling marketing spend towards profitable cohorts, you will be scaling faster.
2. Your acquisition efforts are given the opportunity to scale further. As you expand the size of your profitable cohorts, over time, you are giving these cohorts the ability to layer. Layering larger cohorts that reach the profitability threshold will scale your business further in the same amount of time. In fact, layering larger cohorts that are profitable will extend your LTV payback threshold.
3. Each acquired cohort needs to pay for less proportional overhead expenses. Proportional overhead expenses necessary for breakeven of each cohort is a function of the number of cohorts (or campaigns) that you are acquiring. Using a simple example, a business with a single acquisition source would require the single cohort to pay for 100% of the overhead expenses, whereas a business with 100 equal sized acquisition campaigns would each need to pay for 1/100th of the overheads.

Visually, the normalized impact of increasing marketing spend on profitable cohorts is represented in the graph above. The two curves have identical conversion rates, but the green curve assumes a higher marketing spend that allows the business to acquire larger cohorts that layer faster over time.