Learn to Optimize Your Marketing Efforts Like a Hedge Fund
Running any business is all about obtaining your goals while managing your risk.
For the more tangible destructive and debilitating aspects of the venture, you can actually take insurance to mitigate those acts of God. We're talking about fires, tornadoes, and freak accidents. But what about aspects of the venture for which you cannot file an insurance claim? Operations? Staffing? Marketing efficiency? Well, at least for marketing, there is something you can do: you can manage your marketing efforts like a hedge fund.
Let's say 65% of your bookings come from the big, bad booking sites such as Hostelworld, Booking.com, Expedia, and other OTAs. Now say that 15% are groups, and the rest are made directly on your own website or by phone. This means you are heavily dependent on the commission-heavy OTAs. So ask yourself: what can you do to increase your share of direct bookings? Marketing, marketing, and more marketing. In fact, every mode of marketing falls here, and by improving your overall marketing strategy, you become less dependent on the OTAs. This takes time, planning, and execution.
First, you determine your target market, then break them down into personas. Investigate the behaviors and habits of these personas to formulate a strategy on how to reach them. This involves a lot of hypotheses and experiments, over and over again. You track each of these, find what is working, what is not, and continually adjust. In time, you will have a strong understanding of what is working and what is not, what is safe and what is risky, and perhaps what's really worth the risk. This is where the real fun begins.
With hedging, you are assigning values to these marketing efforts, overvaluing some and undervaluing others. Here, you seek the optimal performance with the optimal risk involved to maximize your return. This zone in which you narrow down your efforts is known as the efficient frontier. And all this only works if you diversify. Try anything and everything to figure out what works. Create campaigns across multiple channels, in a dynamic manner that can change over time as well. You are constantly testing and exploring new marketing distributions.
Just like you should not be dependent on any one booking site, you should also not become reliant on any one marketing channel. This spreads the risk of total failure across all your efforts, giving you some protection against risk. For example, Hostelworld could raise its rates—yes, again—and if you receive 100% of your reservations from them, you'd have to deal with it. The same goes for your own marketing efforts. If you invested fully into a content marketing strategy—a safe and conservative bet—and then Google's SEO Panda algorithm goes wild, dropping your rank to a point where potential customers cannot find your content, you would have to deal with it at least until the algorithm corrects itself. The same goes for unexpected increases in paid search advertising caused by a bidding war, influencers getting too popular for you and demanding more money; the list can go on. Play the field, find what works, and never become too reliant on one approach.
Well, back to all that fancy numbers stuff. I can go into how you can calculate your expected return or variance, but I'm not a number-crunching hedge fund guru. Gaurav Agarwal is, and luckily for us, he gave a talk to the most recent class in the 500 Startups tech accelerator, who then posted a video of it, and the slides, and even the worksheet too. Sure, you'll have to adjust the differences from marketing for a tech startup to marketing for a hostel, but it can't be much more difficult than adjusting a risk portfolio from stocks and bonds to marketing efforts. So watch his video if this is something that interests you. If you like numbers, give it a try, and let us know how it goes.
[embed]https://www.youtube.com/watch?v=lIrWu0B70Yk\[/embed\]