A few days ago I wrote a blog about how to reduce your lead generation costs and today I want to present a counter-intuitive next stage suggestion for increasing profit.
I want you to think about increasing your marketing costs of sales for one very good reason - do it right and you will make more money, possibly much more money.
Two Types Of Marketing
There are only two types of marketing:
- Marketing that you know works - and you can trace leads and sales back to it and calculate your costs per lead and costs per sale.
- Marketing that doesn't work or you don't know if it works or not -my assumption is that if you don't know, assume it doesn't work.
So no surprises with the first recommendation - do more marketing that works and stop doing marketing that doesn't work.
The point of the first article on marketing costs was to help you to improve the effectiveness of your marketing.
The better you match your message and choice of marketing media to your target market, the more effective will be your marketing.
Chuck Out Your Marketing Budget
Budgets are supposed to impose a limit on how much you can spend on an activity.
If you budget £10,000 for training and you spend more than £10,000, accountants will tell you that's bad - you have an overspend, an "adverse or unfavourable variance".
I can't argue about that but it depends on what you get for your money.
Good marketing - remember that is marketing that works by attracting leads who convert into customers and not the pretty stuff that looks nice - brings you more money.
So if spending £10,000 brings you £50,000 worth of customers and £20,000 brings you £90,000 worth of customers what do you do?
Do you act like an ostrich with its head in the sand?
The budget says we will spend £10,000 so we will only spend £10,000 - so it is goodbye to the extra £40,000 of customers.
Or do you say - "My business is about customers and profit" (see what is the purpose of a business) - "I'm going to spend the £20,000. In fact I am going to spend more than £20,000. I will keep spending until the marketing stops paying for itself."
Profit Maximisation And Economists
Ask an economist how to maximise profit and he or she will say profit is maximised when marginal cost equals margin revenue.
That means that the cost of the sale equals the money you get back from making the sale.
Increasing Marketing Costs To Increase Profit
In simple numbers
You buy for £6 and sell for £10 - you make a profit of £4 every time you sell.
You buy for £7.50 and sell for £8.50 - you make a profit of £1 for each unit.
You get the idea.
So if your average customer gives you £50 profit on the first transaction, £150 over the first twelve months and £500 over the average lifetime and your marketing costs show that:
- Customers coming from the Internet through natural search are free
- Customers coming from pay per click on the Internet cost you £15 but you get much wider word coverage
- Customers coming from direct mail letter 1 cost you £30
- Customers coming from telemarketing cost you £75
- Customers coming from newspaper advertising cost £100
- And direct mail letter 2 doesn't work. You've sent out 2,000 copies and not one sale.
What should you do?
Well you could just attract customers through natural searches. You can't get cheaper than free but your marketing is a) very restricted - you depend on people searching for the optimised phrases and b) risky because of search engine algorithm changes.
And you will be severely restricting the number of customers you attract.
So it makes sense to extend your marketing into pay per click to build a bigger funnel. It costs you £15 to attract a customer this way but you still get £35 profit (the 50 minus 15) on the first transaction.
Then there are all the people who don't go looking for your services. They may not even recognise that they need what you offer. They may be thinking about the problem but not your version of the solution.
So starting a marketing outreach program makes sense.
And direct mail letter one is nearly as good as the pay per click Internet searches. So you send the letters out and you prove the numbers...and while the numbers keep working, you should keep sending the letter out.
But some people don't respond to a direct mail campaign - they need what you have but they don't take action.
A telemarketing campaign gives you a chance to interact and to answer any objections that may be holding them back.
But this is a more expensive way to acquire customers. In fact it is so expensive, the profit on the first transaction won't cover the cost.
Provided you are not strapped for cash, it still makes sense. If the average customer gives you £150 profit in a year, spending £75 to acquire a new customer is still a good investment.
After all, you give a bank £100 and they will give you back £103 at the end of the year but only if you find a high interest account with conditions.
Same with the newspaper advertising. It's not great and I'd be encouraging you to find ways to improve the results but it is still profitable.
What Doesn't Make Profit Sense Is...
- Wasting time on direct mail letter 2. It's not working so stop spending your money.
- Spending your marketing budget - time or money - on anything that you can't measure.
- Artificially restricting the money you make by setting false ceilings.
Yes your accountant doesn't want you spending money you don't have. Your accountant doesn't want you wasting your money by spending £30 per customer if it could be £15.
But it makes sound financial sense to keep spending on marketing when you can see that it is working.
So is it time for you to increase your marketing cost of sales?