Every business should look at its cost of customer acquisition. The old business adage goes, "You can't manage what you don't measure." Yet we fail to measure these costs. We seldom take the time to see how effective our marketing was. A poor return on investment can have a variety of causes. Maybe your demographic has shifted, or maybe your prospects are getting their product or services from a new source. Or maybe a particular marketing campaign was never effective, and you just didn't know it.
One miscalculation that many business owners make involves the ease with which they will attract customers. This is called field of dreams marketing. Small-business owners are generally experts in some other areas and somehow they believe that if the core message of their marketing is, "Hey! We are selling XYZ, and we're now open!" people will start pouring through the door.
This is why most start up small businesses are short in what they budget for marketing which is often less than 10% of their operating budgets. The idea of marketing across a variety of media is foreign and would be viewed as an unnecessary expense. After putting out a big opening day announcement, a banner, some flyers and a few small ads, they are astounded that they sit around all day waiting for the phone to ring.
“In business, the idea of measuring what you are doing, picking measurements that count like customer satisfaction and performance... you thrive on that.” Bill Gates
Professional marketers understand the importance of marketing. The amount of advertising "clutter" is so vast that trying to gain new customers with a few ads and flyers is like trying to make a splash in the ocean with a handful of pebbles. The survival statistics are drastic: 30% of all new businesses fail within 2 years and 50% fail within 5 years. While there are a variety of reasons for this astounding failure rate, the primary cause is usually a misunderstanding of marketing and a failure to budget the necessary marketing dollars.
In marketing, a "campaign" often includes several different media, such as a print ad, flyers, radio ads, web site promotions, social media and others. To begin an analysis of your marketing campaigns, pick a relatively quiet day and lock yourself in your office with your accounting records. Using a whiteboard, a spreadsheet or a yellow pad, create separate headings for every campaign you did last year: newspapers, telemarketing, trade shows, door hangers, whatever. For now, let's stick to traditional media marketing, as it has a higher cost of implementation than social media marketing.
You are going to measure your marketing campaigns scientifically by using actual numbers and not "impressions" to gauge the effectiveness of your efforts. Impressions is the term used to quantify the number of people who will see your marketing piece. Actually, it is the number of people who will receive the magazine or newspaper, not for the number of people who actually read it. When you buy radio or TV ads, your cost is based on the number of listeners or viewers the program had in the latest ratings book.
"Tracking marketing is a cultural thing. Either tracking matters or it doesn’t. You’re in one camp or the other. Either you’re analytical and data-driven, or you go by what you think works. People who go by gut are wrong." Stuart McDonald
Under each heading, list every expense associated with that campaign. You'll have to separate out the costs and results of each component of each campaign. For example, you probably executed a direct-mail campaign during the past year. Direct-mail campaigns are time-consuming, labour-intensive and usually expensive. You must increase revenue at least enough to pay for your activities in order to justify doing those activities in the first place.
Direct-mail campaigns involve many obvious expenses, but also many that are not so obvious. First comes the development of the mail piece, which includes writing copy, artwork, logos, images, possibly photography and layout. Then there are the costs of getting the piece to the printer, proofs and the printing itself.
You can test to see which envelope, headline, offer, price and even colour combination gets the most response, which costs money. Then there's the cost of paper. And once printed, the piece needs to be machine folded and stuffed into the mailer.
There is the cost of the mailing list, postage and labour. You may also want to prorate your cell phone, landline, auto and even technology costs, because without them, you'd be working on your campaign from a park bench. Remember to add in public relations and sales costs if they contributed to lead generation.
“Measuring your marketing ROI is like using a map. Without it, you don’t know where you’re going and don’t know if you’re moving in the right direction. It’s key to any marketing initiative and should be a high priority.” Matt Gratt
Congratulations you just learned the cost of acquiring clients using direct mail campaigns. You've calculated the costs associated with one direct-mail campaign. Now repeat this process for each of your other marketing campaigns. If your campaigns included trade shows or conferences, add in airfare, hotel, meals, taxis and your travel time. The more accurate the expenses are, the more accurate your results will be.
This is the kind of analysis you should employ to learn your true costs of marketing. The costs can then be used to assist small business owners compare the direct costs of acquiring clients using each type of marketing campaign and compare it to the revenue generated through that marketing campaign. This data is important to assist you in determining which type of marketing bests works for your business. It also helps in actually determining what you are spending on your marketing efforts and where efficiencies may exist. This is just one of the tools small business owners should use to determine the financial effectiveness of their business. Its one of the areas where business owners are can stay on the leading edge in Keeping Life Current.
Steve is the SBCN Community Mentor and can be reached at steve@NorthernRiverFinancial.ca