Almost all businesses, large and small need to advertise in one form or another. A common mistake that I see over and over is not having a good system in place to accurately measure return on investment or R.O.I. from those advertising efforts. Measuring your return on investment accurately can be challenging but it can also be the difference between success and failure. The two most common mistakes I see are diametrically opposed.
The first big mistake I see a lot is unrealistic expectations, lack of patience and short sidedness. An example would be when I was a starving musician playing in rock and roll clubs. Typical scenario: A new bar owner comes and sees my band at an established club where we (and a lot of other bands) have been playing for years. The place is generally busy and packed on the weekends. The new bar owner has a light bulb go off over his head and says to himself, “This is what’s missing from my club. I just need to book this band and I’m off to the races. I’ll be an overnight success.” So he hires a band, pays $400 for the night, and 20 people show up.
He can’t understand it. He fires the band and doesn’t book music again. Ever. Because he’s already proven to himself that live music just won’t work in his establishment. I hope you are able to connect the dots here and apply this simplistic but true example to your business.
The second big mistake I see is people that continue to throw bad money after good because they think they have to. Think Yellow Pages here. Again, connect the dots.
So what do these opposing examples have in common? They didn’t have a good formula for measuring R.O.I.. That’s the purpose of this article. I’m going to give you the key concepts that you need to consider when measuring your R.O.I. with your advertising. I’ve seen equations, plug and play spreadsheets and plenty of other “tools” to calculate R.O.I. but the biggest problem there is that it’s one size fits all and that’s just not practical because there is no such thing as a typical business.
The first and most obvious thing you need to do is create a good system of tracking. This could be as simple as using promo codes for each ad so that you can track them separately. You could use a discount but that’s not necessary. You can say “mention this ad for preferred pricing” or something similar. What you don’t want to do is to have the person answering your incoming calls to ask, “How did you hear about us?” If the receptionist gets it right, which is rare, you can’t count on the prospect to be accurate, so be sure to get a strong system in place to differentiate your results for each advertising and marketing method or the rest of the data becomes worthless.
Every business is unique and so in order to really measure your R.O.I. you’re going to have to think. You’re going to need to consider these concepts, sort them out and decide which ones apply to your business and what the proper application is for your unique situation. I probably lost some of you there but if you haven’t clicked away yet, read on. I might be able to help you save some money.
I’m going to list some questions you need to ask yourself. If you aren’t sure of the answer or it’s hard to classify an average customer because they go from tiny to huge you’ll need to go through your books and do some math. Don’t just shoot from the hip and think you already know the answers. Do the math first. There will be plenty of opportunities to fine tune your system of measuring R.O.I. based on your gut instinct. As a matter of fact, you should use your instincts, but only after you’ve done the math and answered these questions:
What is my average sale?
What is the frequency of purchase from my average customer?
How long does a customer stay with me before moving on? (retention rate)
What are my margins?
How much do they (margins) vary depending on the size of the sale?
What product or service is my “sweet spot” for profitability?
Does my advertising and marketing target that “sweet spot”?
What is the time frame of my customers buying cycle?
How long can I wait for lead to turn into revenue?
Your business may have some other dynamics that those questions don’t cover. Think about it. What else do you need to know? Once you’ve completed these exercises it’s time to get to work. Depending on your situation you may find that you not only need to make some major changes in your current advertising plan but you may need to make some adjustments in your overall business plan as well.
An example would be if your conversion of a lead takes an average of 9 months and you only have 6 months worth of advertising in your budget you need to do one of three things. You need a more cost effective form of advertising, implement a plan to help shorten the buying cycle or adjust your business plan to make that happen by advertising products that convert into revenue more quickly.
Another thing to consider is at what point in time do you consider an advertisement as recording a success? Is it first touch, when a lead is generated? If so, what is your ultimate conversion rate and what is the time frame? For example: If a company held a webinar and generated a lead the closed six months later a company measuring first touch would credit that new customer with the webinar.
To value last touch would go something like this: A product demo resulted in a sale. If you give all the credit to the product demo and ignore how the lead was generated and how it was nurtured between those two points you are going have problems. I know this seems obvious but you would be surprised how many business owners knee jerk at every “success” i.e. closed deal and don’t give proper credit to the process involved and all of the different things that took place to convert that lead into revenue.
True story: I used to work for an idiot who hired another idiot to do “marketing”. This 20 something “guru” sent a deep discount special via email blast to our entire database. (many of whom were not opted in) It resulted in a couple of small sales and several unsubscribes. The boss was ready to fire the salespeople claiming that if he could sell with email blasts, why pay salespeople?
He failed to recognize that the people who bought from that blast had been cold called and hand entered into the database. They had also been nurtured and engaged with a salesperson and were already on the brink of buying. The deep discount pushed them over the top. The result: he made less money than if he would have just trusted his salespeople to do their jobs as they had been. Again, don’t jump to conclusions without looking at all the facts.
I can’t fill in the blanks for you but I’m going to provide some hypothetical examples that will hopefully make it easier for you.
Jim own a gym. (pun intended) He placed a 1 month ad in a local weekly publication for a total of $500. He sold 10 monthly memberships at $30 a month and stopped the program because he looked at it as though he invested $500 and only got $300 gross in return. He didn’t look at the cost of obtaining a new customer through other means and he he didn’t calculate the long term profit from a new customer acquisition. Sounds simple but it an easy mistake to make.
Mary does marketing for a car dealership. They average $1000 profit per car sold. She ran the same ad as Jim and sold three cars the first month. She was ecstatic and signed on for a year in order to get a small discount. The problem here is that she reached a conclusion without enough data to support it. That month could have been a fluke, I would have suggested to continue month to month for at least two more months to verify the results before committing long term.
Joe has an insurance agency. He specializes in business insurance. He hasn’t done much advertising and gets most of his business from referrals. He makes an average of $5500 commission per sale plus renewals. He ran the same ad as Jim. He didn’t get any leads and stopped the program. Once again, the problem I see here is that he didn’t allow for enough data to come in before determining if the campaign was a success or not. You see, Doctors aren’t the only business owners that need patience. (pun intended) Had he gone another couple of months and then landed a deal he would have realized a strong R.O.I. not to mention potential referrals and residuals. Starting to see the picture? Apply this to your business and you will have some unique tools in place to maximize your advertising budget.
In summary, gather all the data you can. Analyze it thoroughly and then use your gut instinct based on real numbers. Allow the results of any given program dictate where you go with that program in the future and don’t think of each advertising and/or marketing program as stand alone. Sometimes two different programs can each fail on their own but when used together they create a synergy that makes them both cost effective. More on that in another post.
Questions and comments welcomed.
by Matt Fortenbery
CEO Total Printing Solution
To contact the author and find out how this information can help your business click here.