So, here’s a question I get asked a lot. How much should I spend when marketing my small business? Ideally, the answer to your business is zero.
Let me explain.
You should invest, not spend your money, on marketing your small business. Every pound you invest in marketing should return multiple amounts to your business bottom line. But, more times than not; when I ask a business owner to tell me their marketing return on investment (ROI) they shrug their shoulders and say “I don’t know”. Through proper testing and measuring, you will be able to know your ROI, not only for your overall marketing budget but also, for each marketing campaign, ad or promotion you place.
Customer Acquisition Investment.
Marketing Your Small Business is A Customer Acquisition Investment!
Let’s think about marketing your small business in this way:
Your marketing investment is a way for you to acquire new customers. As such, if you are making wise purchases. Then, the amount that you are investing for each customer or, client, on average, will return at least enough profit to break-even. That’s enough profit to cover the cost of your marketing effort. Therefore, the ROI for marketing your business is zero.
That’s, nothing to brag about yet!
However, once you know your marketing ROI, no matter what it is, you are ahead of most small businesses. That’s because you are now in a position to improve. If you aren’t measuring your investment return, then, how can you know if your ROI is increasing or decreasing?
I’ve heard it said that it’s too difficult to measure your return when marketing for your small business, that may be the case for you at the moment. But, by implementing these four steps, they help you better understand the return on your investment.
Four steps to effective marketing for your small business:
- Structure your ad campaign so that you can trace each inbound inquiry that it generates.
- Tabulate the number of enquiries generated from each campaign.
- Record the sales made as a result of your marketing efforts.
- Calculate your Return on Investment, your ROI.
Before we go any further let’s talk planning. Any investment in marketing your business makes. However small is doomed before it returns a bean without proper planning, therefore, if you don’t have a written marketing plan then, read How to Create a Sales & Marketing Strategy for Your Small Business.
1, Tracing enquiry origins or lead source
There are numerous ways you can use to discover analysis data, such as:
- Have an offer associated with the ad which is unique “Mention this ad and receive a free…” I don’t recommend discounting because that is too damaging to your bottom line. Offer an item or service that has high perceived value to the prospect. But, zero or low cost to you.
- Always have a call to action in your ad with a phone number that is unique to that ad. Online virtual receptionists provide the ability to have many phone numbers, at a low-cost while, tabulating the number of call-ins for each number.
- Run an integrated marketing campaign using a personalised URL (PURL). This method combines direct marketing with a customised website containing a questionnaire designed to drive qualified prospects to you. Then, the marketing metrics get automatically reported.
- Another way is to train your sales staff to ask and tabulate how each inquiry learned about your business. This method works if you have a minimal advertising campaign, such as only having one ad in the phone book rather than many ads in different publications.
2, Valuable but insufficient information.
Even though gathering this data is at first, a step beyond most small businesses. It is necessary because insufficient information will not determine your marketing ROI. Remember, you measure the amount of profit generated by each customer that you purchase through the advertising campaign—then calculating your marketing ROI. And, you do this by, tabulating the number of enquiries made by the ad.
So you are making progress towards your goal which is, to measure your small business marketing return.
Next, you must know how many of those enquiries get converted into sales. That’s your conversion rate.
Here is an interesting fact. Some of your ads might produce more inquiries than others. But, provide fewer conversions to a sale. That’s because of the type of prospects the ad attracts. Tracking each enquiry through the sale gives you your conversion rate and moves you closer to being able to calculate your marketing ROI.
3, What is the Average Lifetime Value of Your Customers?
The final metric you need is the average lifetime value of your customers. Here’s where you decide what metrics you use to finalise the data necessary to determine your marketing ROI.
Scenario one: Are the majority of your repeat purchases originating from the ad campaign that initially attracted them?
Scenario two: Must the majority of your repeat purchasers be drawn again by more marketing?
Most small businesses fit the scenario one. Therefore, included in the ROI calculation for the lifetime value of that customer. Usually 3 – 5 years, but depends upon your industry.
4, Calculate your R.O.I.
So, with your data, your marketing ROI calculation is relatively straightforward.
First, figure out the average lifetime pound value and multiply that by your profit margin.
Multiply that by the number of inquiries generated by the marketing campaign, times your conversion rate for that campaign.
You now have the profit produced by that campaign.
Divide that by your investment into that campaign, and you have your marketing ROI.
Mathematically it looks like this:
(ALV x PM x # I x CR)/ £ Invested = ROI.
Years ago, gathering this volume of data was a daunting task. But, not now. Because there are numerous database management systems available specifically designed for acquiring and reporting customer acquisition information. Customer relationship management (CRM) systems are available as licensed software. Or, as an online subscription tailored for specific industries.
Side Note: I personally use ActiveCampaign as a CRM and I like it very much. You can try it for yourself with this 14-day free trial.
The obvious question that remains is:
Now that you know your marketing ROI. How do you set about to improve it – And make sure your marketing is always an investment in your small business?