Posted by Gene Fairbrother (NASE Lead Small Business Advisor) - Do you know if your marketing is really profitable? Do you know how your customers heard about you?
If you don’t know how your customers know about you - and a gut feeling doesn't count - you don’t pass Marketing 101. The first rule of effective marketing is to know what motivates people to walk in your door or pick up the phone to call you or visit your website. And the only way you can get that information is to ask every customer specifically how they heard about you. Was it an ad in a publication, an online click ad, a Val-Pack insert, or a referral from a friend? This knowledge is critical to develop profitable marketing programs.
Not having customer information is a common mistake that many businesses (big and small) make. The bottom line is that if you don't know what motivated customers to do business with you, you can't develop effective marketing programs because you don't know what marketing works and what marketing doesn't work.
Does this take extra time? Certainly it does, but without this information all the money you spend on marketing is at risk because you are only guessing at what works. Don't make the effort to track this information and it's almost guaranteed that you are spending money on programs that don't work and you are casting aside programs that create new customers.
If a marketing program produces more revenue than it costs, is it profitable?
If you answered 'yes' to this question, you are missing a basic financial understanding of marketing. You market for profit, not revenues. Sadly, some business owners think that if you generate $1,500 in revenue by spending $1,000 you are ahead of the game. The reality is that this scenario often means the bottom line is bleeding marketing dollars because the real success of marketing has little to do with revenues and everything to do with profits.
Here’s how it works: when deciding if a marketing program is successful you have to calculate the Return on Investment (ROI). For example, if you spend $1,000 on marketing that results in 125 customers making average purchases of $30 each, the income generated will be $3,750. On the surface this might look fine, but when costs of goods sold, payroll, and administration expenses are taken into consideration you have a different picture.
Let’s take the above a little further by including real numbers from the profit and loss statement. If your net profit averages 20 percent the cost of the above marketing program would actually result in a $250 loss. This is because for every dollar of gross revenue, the business must spend 80 cents in operating expenses and only get to keep a real profit of 20 cents on each revenue dollar. Calculate the real ROI in this example, and this particular marketing campaign lost $250 (20% x $3,750 = $750 and $750 - $1,000 = <$250>).
Although this example doesn't take into consideration residual effects such non-controllable expenses or gaining a new customer who keeps coming back because of your great service, it's important to understand that a profitable marketing program has little to do with the amount of revenues it produces - it's all about the profits.
Unless you track every aspect of your marketing, you could be throwing money down a black hole. Just as you wouldn’t buy a product for $20 and sell it for $15, you can’t stay in business by spending marketing dollars that are not putting profit dollars to your bottom line.