I've seen the data regarding small and medium sized businesses' marketing budgets and for businesses with under 25 employees it's pretty limited - between 55 and 62%, depending on which survey results you look at, of the companies surveyed indicate they spend less than $2,000 annually. What I've been hearing lately in conversations with a wide variety of business owners is that they know their budgets are small and ideally they would like to increase them but don't see a clear pathway in which to do it.
That's troubling for a couple of reasons - one, it usually means there are legacy expenditures in place that are familiar and comfortable but not yielding much in the way of ROI and two, it means that the company can be falling further behind in not updating their strategies and tactics to incorporate the new and powerful tools available in a sound inbound marketing plan. Let's take a closer look at both of these reasons.
While most small businesses have a handle on what they're spending their marketing budgets on, many don't have a good grasp on the performance of their current choices. It should be at least an annual exercise to review where that budget money is going and how those choices are performing in terms of developing incremental revenue for the business. Some of the traditional marketing choices don't easily lend themselves to tracking and even the ones that do may not have been set up in a way to provide a clear view of results. One of the first steps in optimizing a budget for the future is to weed out the choices that are difficult to measure and replace them with ones that provide performance visibility - and are in alignment with business objectives.
Budgets that stay constant from year to year tend to incorporate the same strategies and tactics. If companies begin to evaluate performance - it's inevitable that programs will be dropped and money will free up. Now the challenge is to decide where to reallocate the "found money" in a way that will deliver results. This is where the development of a marketing plan tied to business objectives comes into play. A good plan will provide guidance in making the right choices with the available budget. With the vast array of things to spend marketing money on, having a plan becomes critical in avoiding spending paralysis.
A key question should surface when businesses hit this point - how much should we really be spending on our marketing - or - how much can we afford to spend on marketing? For the balance of this post I'm going to focus on the acquisition side of marketing and ignore the retention side to keep things simple. So, the question should get more focused - how much can we afford to spend in getting new customers?
There are five components to consider in weighing this decision:
- Average transaction value from the typical new customer. Whether your business is selling products or services, you can arrive at this number using historical sales data.
- Average profit margin from this average transaction value. Deducting your direct product or service costs from this transaction, how much profit will be made?
- Sales cycle length. Is your product or service a lower priced offering- which can be quickly concluded or is it higher priced and more consideration has to be given before purchase?
- Repeat business potential. This could be multiple purchases of the same product or service over a specific period or could include cross-selling or up-selling opportunities to the newly acquired customer. In more complex ROI calculations this factor is known as LTV or lifetime value of the new customer.
- ROI requirement - how much of a return is needed to either maintain the current budget level or better yet, allows for future expansion of the budget.
Now, let's run this formula for a hypothetical small business with $10,000 in freed-up budget money and a 15% ROI requirement to see how it works.
- Average transactional value - $250
- Average profit per transaction - 50% or $125
- Sales cycle length - quickly concluded - immediate purchase in most cases
- Repeat business - one time sale
Regardless of the specific marketing choices made in this case - from specific campaign methodology to length of campaigns, the results would need to look like this to meet the performance criteria:
92 transactions x $125 average profit = $11,500 in total profit
$11, 500 in profit minus $10,000 budget investment = $1,500
$1,500 divided by $10,000 investment = 15% ROI
This business would need to weigh the potential for every expenditure in terms of its capability to generate this return. In real life cases, not every campaign response will result in a sale, so factoring prospect to lead and lead to sale ratios come into the equation - but I promised this would be a simple example!
Having this formula in mind as you evaluate where to invest your marketing dollars will help focus your thoughts and improve your success rate in generating incremental business. Keep in mind that regardless of what you invest in, you need to track the performance activity of each choice to have this information available.