Unless your business provides something that is both unique and an unavoidable necessity, and regardless of how big you are or the market sector you operate in, you will inevitably need to market your offering to prospective and existing customers/clients/members.
Marketing, in whatever form, is essential to the growth of any enterprise and, whether you invest money, time or both into it, there is a measurable cost to be borne.
It’s very easy to view marketing just in terms of ‘Spend’ or ‘Cost’, after all on the balance sheet that’s how it is shown. The danger of viewing it solely in this way is that you are ignoring the vital relationships that it creates between you and your target audience.
Renowned marketeer Philip Kotler stated
“Marketing is not a short-term selling effort, but a long term investment effort”.
Sow the Seeds for Profit
The pitfalls of viewing marketing as a cost rather than an investment are most visible in a downturn; when the marketing budget is more often than not the first casualty of any cuts. The problems with this can be threefold:
- Reducing your marketing effort can cause a downward spiral of less enquiries, less sales, reduced market share and ultimately less profit
- A reduced marketing budget can be difficult to increase at a later date. A budget that is cut completely may be impossible to reinstate.
- Your competitors may be treating their marketing as an investment.
By marketing in a fallow period, you will naturally have less competition for your messages, which means you will stand out more and have a greater ‘voice’ at a time when your market is spending less as a whole. You are also likely to emerge stronger than before. Marketing allows you to better control how your clients view you, and even shape their opinions of the business.
Still not convinced? How about this: Companies that spend more on marketing are on average more profitable than those that don’t.
What is a Customer Worth?
It is easy to say that you are treating marketing as an investment, but often the reality is that the spend or budget is led by convenience or circumstance. For example:
“We need more customers – let’s increase the marketing budget”
“We’ve had a great year, let’s up the budget for this year”
And, whilst there’s nothing terribly wrong in formulating a marketing budget based on a percentage of turnover – it has to be affordable after all – this type of arbitrary budgeting ignores the principle reason for the investment in the first place, which is to gain and keep customers.
Customers are the key reason of the marketing effort. In order to establish a worthwhile, investment-led marketing budget to go alongside a robust marketing strategy, you next have to ask yourself: What is the actual worth of a customer to the business?
At this point you need to start crunching some numbers.
There are a several ways you can do this, but a simple model to use is that of the ‘Lifetime Value’ of a customer. This takes into account the expected profit and repeat business from a customer, which will enable you to assess how much investment you can afford, in order to bring them in.
If you’re unable to obtain the actual spend of a target customer or a type of prospect, you can base your figures on a similar existing customer, and use that data in a simple formula:
Example: You run a membership organisation that offers discounted services to members.
(A) An average membership makes you £25 net profit per year after ALL costs.
(B) An average service transaction by a member makes you £8 net profit
(C) This average member buys a service once every 4 months (3 times a year)
(D) And remains a member for an average of 6 years
(A + B x C) x D = (£25 + £8 x 3) x 6 = £294 Customer Lifetime Value
This figure represents the upper limit on marketing spend – what, in theory you can afford – to acquire a new (average) customer. If you are able to spend below this figure to bring in each customer, you can then adjudge that your marketing investment is profitable. This is quite a rudimentary model, which can be expanded to take into account many other factors including predictive analysis, cross-selling and customer recommendation.
Once you have measured customer value, and have identified the most profitable types of customer, the next step is to manage customer value by creating a high Return on Investment marketing strategy that appeals to these customers.
But it all starts by thinking, not in terms of expenditure, but return on investment, and by taking the time to assess what a customer is worth to you.