Welcome to our Marketing 101 Series! Here we will be taking a deeper look into some of the issues that business owners face in everyday situations. Take a minute to read our first discussion: Acquisition Cost.
What is the cost of acquisition? How much marketing do I need to do in order to balance my cost versus ROI? How do I even begin to figure all this out?! These are some of the most common questions we encounter with our clients. Many business owners have never been conditioned to analyzing data about their customer base. They simply do what seems to be most effective, run their business, and cross their fingers and pray every night that the next day will have good profit margins. Well we are here to tell you… STOP IT! There is a science and a mathematical process to making sure your company succeeds and grows. Now if you are thinking “I didn’t bring my calculator and doing fractions hurts my head” don’t worry, we agree. But these are some simple formulas to help you understand Acquisition Cost (AC) and how to manage your marketing to get the best AC for the least amount of time and money.
Identifying your AC –
Firs thing you need to do is come up with the total amount you spend each month on all items related to your marketing. This list probably looks like this:
1. Business Cards
4. Print Material (Flyers, Mailers, Yard Signs…)
5. Sponsorship or local events
6. Digital (Website, Ads, SEO…)
For time sake let’s say that a normal business spends about $10,000 a month on all of these different services. So now that we have the AC we can start to break down if we are spending the right amount, the right way.
Identifying your Profit –
Now we need to determine how much you actually make each time someone spends money with your company. Let’s say that you sell cabinets, your average profit per customer is $1,000, and it takes you 5 leads to sell one job. Using the widely accepted business rule that you should spend 8-10% of your sales on marketing that would mean that if you have a $60,000 of monthly profit your total monthly marketing spend should only be $6,000 not $10,000. So you have two options; either get your monthly lead target from 300 (5 leads to one job, 60 jobs) to 1,000, or you need to cut back your marketing to match your sales. Got all that? Great! Now let’s analyze your strategy.
Strategy and Efficiency –
We already know that your budget is out of line with your sales, so what can we do about it? Let’s break down your AC for each program and re-build your marketing plan for success.
- Business Cards –
- Cost: $20 monthly
- Leads: 2.5 monthly
- Results: 1 job every 2 months
- AC: $1,000 profit for every $40 spent
- Ratio (ROI): 25:1
- Traditional Media – TV/Radio/Billboards
- Cost: $6,000 monthly
- Leads: 100 monthly
- Results: 20 jobs per month
- AC: $20,000 profit for every $6,000 spent
- Ratio (ROI): 3.3:1
- Print Media – Signs, Flyers, Etc…
- Cost: $480 monthly
- Leads: 15 monthly
- Results: 3 jobs per month
- AC: $3,000 profit for every $480 spent
- Ratio (ROI): 6.25:1
- Sponsorship –
- Cost: $1,000 monthly
- Leads: 75 monthly
- Results: 15 jobs per month
- AC: $15,000 profit for every $1,000 spent
- Ratio (ROI): 15:1
- Digital Media – Website/Ads/SEO
- Cost: $2,500 monthly
- Leads: 115 monthly
- Results: 23 jobs per month
- AC: $23,000 profit for every $2,500 spent
- Ratio (ROI): 9.2:1
Clearly there is something off. In this example Traditional and Print Media just simply doesn’t produce a high enough ratio to give us the AC that we want and we are over paying for our marketing each month. So let’s move some money around. If we bump our sponsorship to $2,000 a month and our Digital to $4,000 a month our projected profits go from $60,000 a month to $67,300 and our marketing cost came down to $6,020 monthly. Now we are working on a perfect 9% marketing budget.
I know that it is never fun to sit down and try to analyze and crunch numbers, but to be a responsible and successful business owner in today’s economy it has never been more crucial to use the data at your disposal to make sure that you are operating a lean and efficient company. For most business finding a way to stay revenue neutral while trimming cost by $4,000 a month would mean being able to buy new equipment, additional inventory, or even hiring another employee to take on more projects. This can be the difference between being caught on the plateau and reaching a new level of success and achievement.
For help analyzing your current marketing plan please feel free to contact Bydand Digital and schedule a free appointment.