Low Risk, Big Rewards: Think About “Life Time Value”
Are up front marketing expenses threatening your cash flow?
“I want to grow my business” is the refrain of many small business owners. If you are looking to grow the top line, “sales revenue” then you have essentially 2 choices. Sell new or additional stuff to your existing customers, or sell to new customers. While you should do both, let’s focus on the harder of the two: selling to new customers.
Customer acquisition can be costly depending on the marketing and sales cycle activities required to close a sale. Let’s assume that marketing precedes selling.
Effective marketing “sets up the sale” by first getting you known, trusted and liked. Someone who knows, trusts and likes you is positioned to listed to your sales offer. So regardless of the communications channel you choose to get the word out, your messaging needs
to be direct, compelling and more about the listeners’ issues than anything you are selling. For example:
- If you rely on your website – your message should be simple, direct and easy to navigate.
- If your message is printed – the same principles apply. Use graphics and keep the text to a minimum.
- If your message is delivered in person – deliver a clear 60 second message that entices your prospects to ask for more information.
What you’re doing here is building relationships before even thinking about selling.
Both marketing and selling cost money. Since marketing precedes the selling process, business owners, mindful of cash flow struggle with “up front” marketing expense. Unfortunately these up front expenditures cannot be avoided. Marketing budgets are the seeds that must be planted to harvest the sales revenue crop. The trick is to achieve the same proportion of expense for the seeds compared to the crop. Here’s how.
- Calculate the typical (or average) life-time revenue from new customer.
- Estimate a realistic marketing budget. Many believe that successful companies budget 4-6% of sales they wish to generate. The Small Business Administration thinks it’s between 7-8%.
- Calculate your incremental costs for the new sales
- Be sure to factor in the time it will take to complete your sales.
- Calculate the gross margin’s contribution you expect from the added sales.
- Weigh the sales risk against the benefit and make a decision.
- Target where you find your most likely prospects.
- Create the most compelling messaging to get their attention
- Deliver that messaging using multimedia: In Person, Social Media, Web, Mailings, etc.
- Record sales success feedback to learn which marketing message(s), media motivated the new customer.
- Use feedback to sharpen repeated marketing campaigns to reduce their cost and improve the sales results.
When it comes to marketing the adage, ”You need to spend money to make money.” applies. Okay. But how much? Can I afford it? Maybe I can’t afford not to. See two examples below. They may help.
Example 1: Selling Ink Jet Printers
The first example is about a business decision to sell printers. Let’s assume the printers are ink jet devices requiring regular ink refills. Also, let’s assume that the business owner does not have the cash to pay for initial and continuing marketing required to drive sales. So we need to factor in the cost of barrowing the marketing budget. Another wrinkle arises in that the replacement ink cartridges will be sold regularly over a 5-year period, so we will want to discount the 5 years of revenue by calculating the present value of the ink cartridge sales.
The example above illustrates that to get the benefit of the extended ink cartridge sales, you have to give as much as HALF of the initial sale away for a low volume target and somewhat less for higher volumes. While that seems like a lot (50% of the initial sales revenue to sell 10 printers), it represents only 10% of the gross margin.
Example 2: Filling Under-Utilized Chiropractic Practice
This second example deals with a chiropractor’s practice that has invested in a staff and fixed expenses but is operating at less than full capacity. The owner believes that his real estate and fixed expenses will max out as he approaches 500 new patients. He will need to add staff to provide services but that will cost him less than half of the new revenue he intends to realize.
In this example it is evident that his marketing expenses are handsomely rewarded by the jump in gross margin. As he approaches his goal, the reward is greater than 10 times his marketing expense.
Both of these examples have many assumptions that may not exactly reflect what any reader would agree with. Don’t let that keep you from getting the idea about “life time value” of a new customer and the idea that in many cases taking the risk of up front marketing expenses can pay handsomely. Of course, you can reduce your risk by:
- Having a carefully thought out marketing strategy
- Spending a good amount of time assuring the right prospect targets
- Doing a pilot campaign to prove your assumptions
- Paying special attention to caring for new customers to retain them
- Avoiding one-time, splashy marketing events with little or no follow up and “drip” messaging
And of course, once you have the attention and trust of your prospects, you will need to close the sale by offering credible value that far exceeds the price your customers are asked to pay.
Let me know what you think and email or call if you need help.
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