Northwoods Commerce: How much money does it take to make money?
It takes money to make money…You catch more fish with bait than you do with a bare hook…Half your advertising works-you just don’t know which half.
You have probably heard variations of all of these sayings at one point or another. Each phrase relates to the fact that you need to invest to get a return. If you never buy a lottery ticket, you can never win. Unlike the lottery, which is guaranteed to cost you money over the long run, your marketing investments should provide you some sort of return. The return could be in making it easier for your sales people to sell or stronger brand awareness and preference, or even directly lead to more sales.
The difficult questions to answer are: Do you know what is working and what is not? How long does it take to get results and what is a reasonable return? What is it that you are really trying to accomplish? To answer these questions, you need a systematic approach to measuring your marketing return on investment. Just as you can tell what CDs at banks give you a higher yield, you should be able to judge your marketing programs by how well they help you meet your objectives. With a measurement dashboard in place, you should be able to tell which programs move the needle the most on your key business building drivers.
If you can’t measure it, you can’t improve it. The problem is, most people measure the wrong things. Sure, you or your accountant can look at the income statement at the end of the month and see if more or less sales were made. Does that really tell you if your marketing is working or not? Does it tell you if your sales efforts are paying off or not?
On the surface, simple measurements like sales would appear to be good indicators of success. Sales, however, are really often a lagging indicator and do not give a true picture of what is working and what is not. To know if you are making progress, you need to know what the key drivers of your business are. If your sales are down, is it because you had fewer people come into your store or did your sales people make fewer sales calls? Did your sales people receive good quality leads or were their leads simply random numbers from the phone book?
By measuring the activity that leads to sales (sales calls made, the number of store or website visits, the percentage of each of those efforts that lead to a sale and the size and type of that sale), you can concentrate on the real activity that drives sales. When measuring the effectiveness of your marketing efforts, you will need to know some basics about your business: What is the average size of a sale (for you and your competitive benchmark)? On average, how often do customers in your category make a purchase? What is the lifetime value of an average customer? Who are your “heavy users/best customers” or the 20 percent of most categories that make up 60 to 80 percent of the category volume? How much are they worth as a lifetime customer?
When you run an ad, does it lead to an increase in the number of inquiries or sales leads? Does the advertising make it easier to get appointments because your awareness level has been improved? Did the advertising increase store or site traffic versus a comparable time period?
Knowing the activity that drives sales, the value of a customer and the cost associated with key sales generating activities will help you create a more accurate budget that will result in a measurable return on your investment. Not every marketing or sales activity will work, but by constantly measuring the results and comparing those results to prior activities (or no activity at all) you can do more of the programs that do work and fewer or none of the programs that don’t.
If an advertisement costs you $2,000 but it increased your floor traffic by 15 percent and that additional floor traffic converted into 70 percent of the people who entered the store buying a basket of goods that averaged $45 in revenue and $18 in gross profit, you would need to bring in a little over 111 “extra people” that week-or about 16 people a day for a week to break even. If you were averaging about 100 customers per day to begin with, this might be a reasonable program with reasonable expectations. If a few of the new customers like their experience and come back and make $45 or higher purchases every week in the future, then your advertising will continue to pay dividends well into the future. By the same token, if you didn’t generate quite enough revenue off the ad to pay for itself in a week but you still generated new customers who would be with you for a long time, your ad may still be paying good dividends but you will simply have to wait a little longer for the payout.
When measuring the effectiveness of particular advertising or promotion programs, you also need to keep track of and make note of the strength of the offer being made. Was the advertisement or promotion itself attention-getting and persuasive? Was it a deep discount or just an “everyday” type offer? Did your competitors have any sort of offer at the same time? Was the weather another event in the market a factor that influenced sales?
Once you understand the relationship between activities that generate sales, the cost of improving or creating more of those activities and the value of your customers, you can begin to objectively tell how much money it will take to make you more money.
About the author: Scott Francis is president of Topline Development LLC, a strategic marketing consulting group that provides helps companies determine how they can make the most amount of money with the least amount of resources. To learn more about Topline Development LLC, visit their website at ToplineDevelopment.com or contact Scott directly at [email protected].
Note: This story first appeared in the October/November 2011 issue of Northwoods Commerce magazine.
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