November 1, 2014

Sales and Marketing Advice for Florida business

How to spend your marketing dollars wisely

Ron Stein | 3/29/2013

There are so many things you can spend your marketing dollars on -- It just never seems to end. If you want to connect with qualified prospects and convert them to revenue, you'll have to lay out some money.

It’s not an option -- it’s just part of doing business and a challenge getting it right.

So how do you know when your marketing initiatives are cost effective? The answer may seem obvious enough -- if new customers are buying, whatever you’re doing must be working.

Yet that’s only a part of the equation. Even though the top line is growing, the bottom line can still suffer in a big way.

The cost of acquiring a customer is an important gauge of marketing and sales effectiveness. it's important to measure and optimize the results of the money you’re shelling out to produce leads and turn them into paying customers.

How much should you spend on marketing? Here’s an easy way to determine if you’re doing fine or are in a danger zone.

Pick a timeframe to measure. Taking a snapshot in time can be misleading. If the marketing initiative is new, it’ll probably take a few months to know if associated sales are still growing or have flat lined. Plus it’s not unusual for marketing costs to be frontend heavy. Depending on your business model and industry the right period of time will be at lest six months, if not more.

Dust off your calculator. Add up all of your marketing and sales costs and revenue over the period you defined. If you’re considering a new marketing promotion, forecast your expected expenses. Now do the same thing for your revenue, but factor it against your gross profit margins. This is the first hurdle -- take a step back and ask yourself if this makes sense and has a reasonable chance to get you to your goal.

Calculate your cost to acquire a customer. Here’s where you’ll get the first glimpse of where your company stands. Divide the total expenses you laid out (or expect to spend) for marketing and sales by the total number of new customers you acquired or expect to come onboard. Do not include repeat business from these new customers. Now multiply your total top line revenue -- now include repeat business -- from this campaign by your gross profit margin to give the total gross profit. Hang in there, you’re almost done!

Determine your CAC score. The last step is to calculate your cost to acquire a customer (CAC) ratio to see how you score on marketing and sales effectiveness. Grab the gross profit number and divide that by the total marketing and sales expense you added up earlier. The score you end up with will tell you exactly where your company stands. Any number below 1.0 says that you’re losing money and something is broken -- fix the business model before going any further! A score above 1.5 is headed in the right direction.

Here’s an example -- Let’s say over the next 12 months you are planning to spend $46,000 to subscribe to an email marketing service, develop a website, hire a part time assistant to help with email as well as phone follow-up and customer support, paint your showroom and add new displays, pay for a billboard on a major roadway, throw 4 events, and start using Google AdWords pay-per-click ads.

You expect to acquire 3 new customers in the first three months, 5 during the next three months, 15 during the next three months, and 29 in the last quarter for a total of 52 new customers. Of those 52 new customers, you expect 10 to purchase again, making for 62 total revenue events. And you project that the average sale is $2,900. Oh by the way, your margin on each sale is 35%.

Let’s see if that makes sense.

Acquisition Cost Per New Customer = Total Marketing & Sales Expense / Total New Customers: $46,000 / 52 = $884.62

Total Expected Gross Sales: 62 X $2900 = $179,800

Total Expected Sales @ 35% Gross Margin: $179,800 x 0.35 = $62,930

CAC Score = Total Profit / Total Marketing & Sales Expense: $62.930 / $46,000 = 1.37

So what does all of this suggest? In our example, your first thought might be that spending $884.62 to acquire a new customer isn’t too bad when the average sale is $2,900. But that view changes when margins are factored in. The CAC Ratio is in dangerous territory.

You can spend money to increase the number of sales leads, increase the number of leads that convert to customers, increase the revenue generated per customer, increase the profitability of each customer, or come up with a marketing plan that is less expensive to implement.

Just choose carefully to keep missteps from adding up to wasted dollars. Focus your efforts on the strategies, tactics, and tasks that have the most impact on moving prospective customers to a revenue event -- profitably.


Read earlier columns from Florida Trend's business coach, Ron Stein
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Ron Stein is the founder and President of FastPath Marketing (www.marketing-strategies-guide.com). He has more than 20 years experience in sales, marketing, and business development, working positions ranging from salesman to vice president of sales and marketing to CEO of startups with industry leaders such as Motorola, VideoServer, Paradyne, and SercoNet. Ron is a member of the advisory team at the Tampa Bay Innovation Center, a nationally recognized entrepreneurial and startup accelerator for the state of Florida. He can be reached at 727-398-1855 or Ron@FastPathMarketing.com

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