A burning question facing the majority of business owners is how much to spend on advertising to promote my business, product, or service.
This question has been asked for decades and the answers given by pundits, consultants, books, articles and the like vary widely. The majority agrees that somewhere between 10% and 30% of the businesses gross revenue should be re-invested into promotional activities to generating new business and encourage recurring business. I’m writing this article today because I believe this line of thought is existentially flawed.
Percentage formulas for investments are like going on a road trip without a destination in mind… As the management theorist Laurence J. Peter wrote “If you don’t know where you are going, you will probably end up somewhere else.”
I propose that you first find your destination, and then plan how your business will arrive there.
To use an example, if you are funding a retirement account you first determine the number you need to save by a specific age, then you save, you invest, you take specific steps to reach that number. You don’t say “I’m going to put away $50 a week and by the time I’m 65 whatever I have will just have to do…” that method will often lead to failure and so will a simply gross re-investment approach to marketing and advertising. As business owners we know our overhead expenses, rent/mortgage, payroll, insurance, utilities, cost of goods sold, and so forth. Successful business owners drill down these expenses vehemently and actively manage them month over month forming effective budgets. Why then should you not have a specific budget for marketing, and what’s more why should you not attempt to drill that expense down month over month as you would any other operating cost? So I propose to you today a non-establishment theory that has worked time and again throughout my career, whether building my own businesses or growing my clients: Utilizing Marketing Metrics to Improve ROI. So, what does this mean and how does it work?
Track and Evaluate Marketing Metrics, Adjust Accordingly and Repeat
In order to create sustainable growth an organization or individual must generate profit. The traditional thought process for marketing is based upon gross re-investment, but profit is a game of NET not gross. What you keep is far more important than what you spend! Therefore a successful marketing budget must be based upon a sustainable and scalable formula. The foremost formula I have applied in over a decade of business consulting is as follows: 1. What is a new customer/sale worth in profit to your business? 2. How many new customers/sales does your business need to generate monthly to survive? 3. How many new customers/sales does your business need to generate monthly to thrive? Based upon the answers to the above your marketing budget should take the earmarked portion of profit per customer/sale and multiply it by the minimum new customer/sales to survive in order to determine your minimum monthly marketing budget. Likewise, multiply your earmarked figure times the ideal number of new customers/sales to determine your maximum monthly marketing budget.
To get started, I recommend to my clients earmark 20% (or less) of the profit (not gross) for marketing reinvestment each month.
The second part of this formula resides in data tracking. Here are some definitions that are important to understand the formula: Cost Per Response – How much was spent to generate a phone call, click through, or other reply to your advertisements? Examples: newspaper ad, television ad, online registration for a newsletter Cost Per Contact – How much was spent to generate a customer, client, or patient that walked through the front door? Or if you are an online business a customer that visited your website. Example: telemarketing Cost Per Conversion – How much was spent in total to generate a customer, client, or patient that made a purchase or completed a transaction? It’s critical to know the cost per conversion to insure it is reasonable based on the profit associated with the product/service being promoted. Cost per Conversion is great for answering the question, “What does it cost to get this newsletter subscription?”.
SUM OF MARKETING COSTS / CONVERSIONS = AVERAGE COST PER CONVERSION
3,000.00 / 20 = $150.00
But you also need to answer the question, “How many newsletter subscribers do I need, on average, to make a sale?” THIS is Cost per Acquisition.
How many times have you tuned into an episode of ABC’s Shark Tank and one of the Sharks asks the investor the following question, “What is your cost of customer acquisition?”. That question is asked nearly every episode by some of the nation’s top business builders. They know if you cannot clearly define what each new conversion costs you have no control over your profit margin and your business will likely fail. If that question goes unanswered, or is answered poorly, the business owner has NEVER received the Shark’s investment. If a percentage of gross re-investment is not good enough for the Sharks, why is it good enough for you?
So how can you determine your cost per response, contact, and conversion?
In my experience the easiest and most accurate way to do this is with software. If you are online retailer or service provider Google Analytics can supply most of the metrics necessary to capture this data. If you are a “brick and mortar” business tracking the customer, client, or patient’s phone call response to your marketing efforts is a great way to mine this data offline.
In our company we use a platform called Track My Calls (www.synergy411.com), this allows us to assign specific tracking phone numbers to each type of advertisement we utilize so that we know if the phone call came from print advertising, radio, TV, direct mail, the web, etc. The tracking reports generated look like this sample from one of our clients:
As you can see above there is a specific phone number for each medium (TV, print, etc.), you can even purchase multiple numbers for different ads allowing you to test not only the placement but the content of one ad against another. To calculate your cost per response simply take the number of calls divided by the cost of the advertisement and there you have it!
Tracking for Determining Cost Per Contact
Now to get your cost per contact, cost per conversion will require some internal tracking. If you don’t have a fancy CRM solution to do it for you a simple form such as the below used for one of our medical clients should fit the bill just fine:
Making Adjustments After Analysis is Key
This method of tracking serves two purposes because now that we know our cost per response, per contact, and per conversion we also have objective data to compare marketing mediums. For example, if TV has the lowest cost per response but generates the least conversions we know to:
A. Assess and if necessary re-train our reception/sales staff to increase conversion from the initial call.
B. Modify our placements (to different stations, times, programs, zones if cable, etc.)
C. Change our advertisement (message, offer, response runway, etc.)
D. Move our budget away from this medium and into a more effective one (as demonstrated by the objective data)
If you follow the above you will truly utilize marketing metrics to increase ROI of all your marketing efforts! While this practice may take more time, involvement, and critical thinking than a simple gross re-investment percentage, it will greatly reduce your marketing costs while simultaneously growing your client base, revenues, and profits as a company or individual.
That said, if going it alone seems too arduous, feel free to contact us at 855-854-6332 or visit our website www.integrativepracticesolutions.com to request a FREE evaluation of your current marketing efforts. Ultimately, we may be able to help you by implementing the quantitative marketing system we have pioneered as summarized within this article.
President-Integrative Practice Solutions
About the Author: Lance Liberti is a nationally recognized healthcare consultant and new patient marketing professional with more than a decade of practical experience in the field. His experience spans multiple areas of practice including non-surgical spinal decompression, medically supervised weight loss, aesthetic medicine, and non-operative extremity pain management. The president and CEO of Integrative Practice Solutions, Inc. Mr. Liberti specializes in assisting health and wellness professionals integrate boutique medical services into their practices to offer non-surgical solutions to those suffering from various degenerative musculoskeletal conditions. To learn more about Mr. Liberti’s extensive experience and see examples of his work products view his LinkedIn profile here: