How do you set the marketing/advertising budget? Traditionally, companies peg it as a percent of revenue.

When business is down, like it has been for the past two years, the advertising and marketing budget drops, too. Just when you most need advertising and marketing to drive sales, there is less budget.

This may make prudent financial sense but terrible business sense. As Jonathan Shapiro, CEO of MediaWhiz, New York, points out in a recent article, today “the Internet offers numerous ways to create demonstrable and predictable ROI from one’s marketing efforts.” If you knew with a very high level of assurance that each dollar you spent on marketing would produce, say, $10 in revenue and $5 in net profit, wouldn’t you direct every dollar you could into that marketing?

Today, search engines — especially Google, but others, too — have emerged as serious revenue pumps. Almost all buyers start with a Google search. They type in a few key words and up pop many screens of results. The search results are so on-target that few bother to look past the first screen or even the first hits.

So, you want your product or service to be among those first hits. It doesn’t matter what and how you sell: consumer or industrial, product or service, direct or channel. If people go to search engines to start the buying process, you want to appear in those first few hits.

Search engines make their revenue mainly by selling ad placement links based on key search terms. The price for popular key words in a given category is based on bids. If you sell industrial pumps and want to be sure to come up first whenever somebody searches on industrial pumps, you make a strong bid for that key word. How strong a bid depends on your track record at converting search hits to sales.

Now you and the chief marketing officer (CMO) can sit down to a very different budget discussion. Instead of talking about the marketing budget based on revenue forecasts, you talk about the ratio of clicks to conversions and the net profit from each conversion. That determines how much you can bid for search placement. This holds true for marketing through search engines, Web sites, email, social media — anywhere you can correlate exposure (clicks of one sort or another) with conversions.

This isn’t exactly new. Traditional direct marketers and old-school sales managers usually understood that x cold calls leads to y sales presentations which will result in z sales. The difference with Internet-driven marketing is that the numbers generally are bigger and the action is faster and more immediate. Also, it is much easier to capture and analyze the data.

Before jumping into this new budget discussion, however, the CFO needs to make sure that the CMO’s conversion data are accurate and replicable. He also needs to understand the organization’s capacity to handle the projected new business.

Finally, to make this work like a money machine, you need good measurement technology and analytics. That’s where vendors like MediaWhiz and its competitors come in. Go to Google, type SEARCH ENGINE MARKETING, and see what vendors pop up. ###