Are you Wasting your Marketing Budget?
“Half my advertising is wasted. The problem is, I don’t know which half”.
If this applies to your micro-business then there are some simple techniques you can use to improve the measurement of the effectiveness of your marketing.
Many small businesses advertise without giving enough thought as to why or how they’re doing it and then have trouble tracking the results afterwards. The following tips will help micro-businesses make sure they get the most out of their marketing and advertising expenditure.
Work out how much your customers are worth to you
You need to work out how much profit a customer makes for you. For example, if a customer buys a product from you at £100 which gives you £20 profit, and they buy it every quarter, you’ll make £80 per year from them.
If, on average, they buy from you for three years then you’ll have made £240 from them. You need to allow an element for averages and future inflation, so you could say each new customer is worth £200 profit for you over the longer term.
Calculate how much you can spend to obtain a new customer
Your ‘Acquisition Cost’ is simply the cost of your advertising divided by the number of sales. So if you spend £1,000 and make 50 sales, you have an Acquisition Cost of £20.
Using the previous example, if your profit is £20 from each of these sales you might say that the advert was a waste as no profit was made. However, as we’ve seen, each customer is actually worth an average of £200 to you so it’s probably a small price to pay !!
Have a marketing measurement system
These calculations work best when you have a marketing measurement system in place and a database. (You can read more about using a database in Does a Micro-business Need a Database?)
It doesn’t have to be complicated. For example when a customer calls up and says they saw your advertisement, you ask ‘which one?’ and then record it. It’s then a relatively simple exercise to work out how much your advert cost and how many people responded to it. Once you start doing this, you will very quickly build up a picture of what adverts work for you by comparing the Acquisition Cost of each.
You can also overlay the profitability of customers gained through different adverts – having a higher Acquisition Cost for some media is fine, if they provide more profitable customers.
What about awareness advertising?
There will be some occasions when your advertising is used purely to generate awareness. This is not necessarily a bad thing, but you should be aware of why you’re doing it and how much you spend on it.
If you choose to sponsor the local Youth Club football team, for example, don’t expect to make a lot of money from it or measure the success in terms of Acquisition Cost. Instead, treat it as awareness advertising and accept that it is part of a wider programme of marketing. Creating awareness can make the task of selling your products easier, which will hopefully reduce future Acquisition Costs.
Some specific techniques for measuring awareness advertising are given in Measuring Awareness Advertising.