Marketing is fun! That is especially true when you feel in total control of the channels and activities you are running.
What that means is knowing exactly how much you are spending and what you expect to get back in return for that investment (ROI). Then from that, you can calculate the expected cost per client. This is your acquisition cost.
I recently held a training webinar on this topic, with our community of business executives, and I wanted to share this with you here as it can be so powerful if implemented correctly.
Before you do this exercise, you might want to learn more about how to select the best marketing channels for your business below.
In addition to this, I have also written about how to be sure you are targeting the right market for your business here.
Prefer to read rather than watch and listen? No problem – here’s everything I said in the video as text:
Please note that you should go through this side by side with the above video, as I will be demonstrating some practical exercises and talking through some examples.
Most people are not spending enough on marketing because they don’t know whether their marketing is working or not, or if they can deploy the money elsewhere.
There are also quite a few people, who throw money at marketing channels and strategies, hoping something will stick. That they will figure out some magical route to market, which will give them the growth that they would love to have.
Today I am talking about this acquisition cost and how you look at your marketing.
I will be discussing 3 key points:
1. What data do you need to have in your business from a marketing perspective?
2. How do you then maximize the ROI, once you have that information for your marketing channels?
3. Once you have maximized the ROI, how do you maximize the absolute growth, that you can have in your business?
For most businesses, if I ask them “How much are you spending on your marketing?”. They will tell me the total, and then there are some businesses, who will give me the channel split as well.
They might also have a sense of saying “How many enquiries I’m getting from each of these channels?”, if they are measuring some of their figures and this is already better than the average case, I would say, if they know how many enquiries, qualified enquiries, they are getting from each channel.
The question is, “Is this channel paying for itself? Is it working?”.
Interestingly, what I have noticed is, that if there is a channel where the money is being spent and there is a lot of noise and a lot of action happening, then they feel that this channel is working for them. Which might be the case or might not be the case.
How do I objectively identify whether this channel is making a return on investment or not? That is the first thing, that we will be focusing on.
Have a look at this template (please refer to the video above).
As you can see, I have taken an example of four marketing strategies.
Let’s imagine, every month, this business is spending £1000 on paid ads. They are getting 10 enquiries.
The conversion rate of this business say is 20%. When I say conversion, as in, how many clients they are getting, from these 10 qualified enquiries.
We need to know, how much we are spending on that channel. If you can start monitoring, how many enquiries you are getting and the conversion rate, through your sales process. After that, this is where we start to understand how our customer is behaving. This goes back to the avatar training.
In this case, let’s imagine the client spends £1200 annually. The margin here is 35%, and I’m talking about gross margin because marketing spend is sitting in the overheads. You’re looking at GP level and therefore, when you’re looking at return on investment, as far as marketing is concerned, you’re always looking at the gross profit or gross margin.
Let’s imagine, that customer retention is one year.
Look at the six-block colours. This is the information you need, to realise whether you are making money on that marketing or not.
As you will see, this automatically tells us, that the channel is not paying for itself. There is a negative 16% return, you’re losing money on this channel.
If you look at the analysis here, the current cost per enquiry it’s £100 and what is the allowable cost of enquiry? Just to clarify, how to calculate that it’s very straightforward. If you look at gross profit per customer, that’s £420 and the conversion is 20%, so you simply multiply these two figures and that gives you the allowable cost per enquiry.
And why? Because one customer is giving you £420, but to get one customer, I have to have five qualified enquiries. Why? Because my conversion is 20%, which means if £420 divided by 5 is £84, is my allowable cost per enquiry, for me to break even on that marketing cost.
I’m spending £100 right now and that’s why there is a loss on this channel.
My request is, that for each one of you who’s listening to this, please use this template to plot your own data, depending on what channels are working in your business right now, to identify whether it’s working or not working.
Because the first channel is costing money to the business you can’t even talk about lifetime value here, as such.
If I give you an example, and I have simply plotted this further, figures for SEO, Linkedin and referral, and as you will see, this data will give you some new answers here.
Why I have consciously taken ads as lesser, to make it as real as possible that, because with paid ads, people are a little more price-conscious that’s why the retention is weaker. The margin is on the lower side, wherein if someone is coming through SEO, or through Linkedin, or referral, the GM’s are higher, the retention is higher, and yes, the overall spend and the price sensitivity is also better in that sense.
That’s why there is a slight difference, that you might see when considering ads compared to SEO Linkedin, and referrals. When you look at that, it automatically tells you that, yes, these three channels are working quite well and in fact, they’re making a solid return on investment, which is brilliant.
You will see for these channels specifically, the allowable cost per enquiry and therefore the maximum level you can spend, to get a client and what is the current cost per enquiry.
Another distinction for you to make here is, when I’m doing these calculations, I’m not taking into account 1.5 years of retention, I’m taking, what’s the annual gross profit that I’m making on that client for one year, just to be even more conservative. However, you can look at the full length of the client if you prefer.
If I look at the total annual gross profit, just based on these clients generated, which is the five clients, it’s £3000. The total return on marketing is 50%, right? I’ve spent £2000 and I’ve made £3000 gross profit, because of these marketing initiatives, and therefore my return is 50%.
Once this is done, I know which channels are working well, but a very important decision to be made by the managers and senior leadership team is to ensure you are allocating your resources effectively.
Am I allocating my time properly?
Am I allocating my people properly?
Am I allocating my marketing resources, budget and people properly?
That’s the next question, how do I maximize the allocation gains?
Because once the machine is fine-tuned, then we can start looking at scaling up but otherwise, you will leave money on the table.
Let’s look at the maximization side of things.
If you look at the row I have added, telling me what my current allocation of money is, across these channels, 50% is going into ads, 40% in SEO and a small amount in referral. Referal here may be a little bit of the gift or maybe some Christmas event, which is kind of spread over the entire year.
When I look at the return, I realise that these channels are giving me a good return. This will sound very simple to you, but it also gives you the biggest impact.
If you look at the reallocation, in this example we’ve said we’ll keep to the same marketing budget but how do I change the mix? Where am I getting the best return?
As you will see, I’ve moved my money from paid ads to SEO, Linkedin and referral. I have not increased my SEO budget. I’ve kept it the same because I know that, if I make from £800 to £1000, it’s not going to give me a dramatic increase, just because I know how SEO works.
£800 is already a good monthly budget sitting here so I’ve plundered money in Linkedin and referral. I have also kept some money in ads, just to test and measure how to make it better. Right now, my focus is more on effectiveness and not efficiency.
I am looking at how I allocate my budget most effectively, in the channels giving me a return on investment.
Efficiency is defining what you need to do to make things better. That is a separate exercise that needs to be done, to make this channel more efficient and work for itself. For all the channels, the focus is on reallocation and ROI maximization.
And remember, improving conversion, especially if it is coming in as an incoming lead, might be a trickier thing to do, but you can simply allocate the budget and get a better outcome.
Earlier, I was getting five new customers, now I’m getting 7.4 new customers, with the same budget of £2000, and obviously, with the improved GP, not improved, with the more customers and the same kind of GMs, I’m getting better GP, which is £5208, and therefore my return has gone up from 50% to 160%.
That’s the power of this exercise. It’s not about knowing the maths, it’s how you are deploying that knowledge into making some meaningful decisions. Testing and measuring, constantly checking whether it’s working or not.
The next thing and the third thing which I spoke about earlier was, now how do we scale? How do we go for absolute maximization?
We can build a war chest, we can deploy that in other expansionary mechanisms, but how do we go for absolute growth?
This is for people who do this kind of exercise, who are aware of their numbers but are reluctant to spend more. I will show you some changes, I did here, and this is again, for you to keep in the back of your mind.
You will notice that I’ve now created new input and output cells. I can scale up because I know what channels should get what money.
I’ve gone for £5000, and I’ve kept a similar kind of allocation as before, in this case, to maximise ROI. Right now, I can see my current cost per enquiry. I’ve allowed some inefficiencies to come in because it’s possible when I’m doing some solid SEO, I’m not getting a similar kind of return, so basically, the diminishing returns have kicked in, but there are still returns.
My cost has gone up slightly, there is an increase in cost, here it’s doubled. I’ve assumed that it’s not going to be linear there will be diminishing returns coming in as I spend more money on certain channels.
My total GP is £8655, and as you will see, my return is lower. because I’ve built in those inefficiencies, but you know what? Ask yourself a question, how many times will you be spending £5000, on your business if you knew for sure, that would give you £8655, as a return?
You know you are capping at the right levels; you know exactly what the allowable cost per enquiry is.
Marketing is fun if you know exactly how to generate leads effectively, then scaling to the moon is much easier.
If you would like to discuss anything mentioned here or to arrange a complimentary strategy review, get in touch below.