@JayWinThanks for providing your source; I have been using...

@JayWin

Thanks for providing your source; I have been using Similarweb too, so your reference is just as reliable as mine is.

With regard to your calculation, and if I understand correctly, your reasoning is more or less as follows: “if ~38% of TPW’s Revenue is driven by clicks on Google Ads, then 50% less spend on those ads means 50%*38% = 19% less Revenue.”

The problem I see with this implication is that it is backward-looking, hence it fails to capture the dynamic drivers of TPW’s “organic” Revenue growth, namely a) the positive year-on-year trend in the percentage of repeat customers (i.e. not coming from Search), a) the positive year-on-year trend in the percentage of organic (i.e. unpaid) search traffic, c) the positive year-on-year trend in the conversion rate (including transactions from paid ads), and d) the positive year-on-year trend in Revenue-per-active-customer (including revenue from customers acquired through paid ads).

What this means is that, if TPW decided today that they want to budget a lower Marketing spend as a percentage of FY2023 Revenue, they would probably do so under the assumption that a) a lower percentage of FY2023 Revenue will be coming from Search (vis-a-vis FY2022), b) of the Revenue coming from Search, a lower percentage will be coming from paid traffic, and c) the portion of Revenue coming from paid search traffic will have a significantly higher average dollar amount per click, due to the compound effect of i) a higher conversion rate (i.e. average # of purchases per click) and ii) a higher expected spend per customer (i.e. average dollars per purchase).

In particular, using the data points from recent TPW presentations, the combined effect of i) and ii) is an increase in average dollars per click to the tune of +20% pa; on the other hand, the cost of lowering the bids for Google Ads search words is per click, not per dollar earned.

If you take as a starting point the likely level of Revenue growth corresponding to the current [Marketing spend]/Revenue, and then factor in all the organic growth drivers above, then the expected impact of a halved [Marketing spend]/Revenue on FY2023 Revenue is far less than -19% according to my modelling, and in particular it still implies positive growth relative to FY2022.

An objection that can legitimately be made to my reasoning is that it implies a natural decline of [Marketing spend]/Revenue over time, as long as all these organic growth drivers are in force; so, one could ask, why is it then that the ratio was at 13.6% in 1H22, i.e. higher than in any reporting period over the previous five years?

Beside the increased “brand marketing” (i.e. TV advertising and other similar initiatives), the main reason for that has been the sharply increased “cost per click” in the post-Covid period: while that is commonly described as Google using its pricing power to take advantage of the boom in online retail sales, the auction-driven nature of the ad pricing makes me think that the rise in cost was mainly the result of increased competition for ad space at a time of stimulus-driven excess liquidity. I personally expect this trend to revert, in the current environment of tightening financial conditions, so it seems reasonable to me to assume that the cost per click will at least not increase further from its current levels. That, in turn, should entail a natural decline of the [Marketing spend]/Revenue ratio all else being equal, i.e. before any proactive Management decisions on the matter, which is what I have incorporated in my modelling.

Hope this helps, cheers.