Cost of Marketing and Advertising Isn’t THE Important Part

Frequently I ask small business owners what kind of marketing they are doing. Most of them give me the exact same answer.

  • They have chosen the least expensive form of marketing they can
  • It’s usually networking or word of mouth
  • Most are getting nothing from it, or very little.
  • A few will tell me it’s working well, but they’d sure like to have more clients with a lot less effort.

Here’s something that is frequently a big aha moment for most of these business owners.

It isn’t the upfront cost of marketing that is important, it’s the cost of acquiring a client.

Here’s why. Let’s lay out some assumptions:

  • We’re sending a letter that costs $1 each.
  • You are going to send it to $1,000 people
  • You get a response rate of  0.1%, 1 out of 1,000
  • The response rate delivers a number of leads, then your sales close ration is 1 in 10.
  • You are selling an item for $1,000, and make a 30% profit (which does not include your marketing expense, only the cost to make or buy the product for resale), $300 per item.

 With a 0.1% response rate, you will acquire one client for every 1,000 letters. In this case, one client for the whole batch of 1,000 letters you are sending.

At $1 per letter, that’s a cost of $1,000 for a lead. Now your sales close ratio is 1 in 10. That means that you have to have 10 leads at $1,000 each. You’d have to send 10 different mailings at $1,000 per mailing before you acquired your first client. You just spent $10,000 to make $300.

This obviously doesn’t work.

Is the problem your marketing, or your sales? 

Most small business owners would simply stop spending the money on marketing while saying “Well, that doesn’t work. I’ll never do that again!”

WRONG ANSWER! If you don’t find the solution to this problem, you might as well close your doors . . . not later . . . BUT NOW. So, you either have to find the answer, or stop the blood loss. But the answer is really easy. It’s just eluded you so far, right?

I’m not opposed to you finding less expensive ways to market, but don’t make a rash decision to stop marketing, or to stop this particular marketing. Some of those numbers are typical, or average marketing expenses for most small business owners. But they are killing the business.

Let’s review starting with the response rate of your marketing.

The national average for direct marketing response rates is between 0.5% and 1%. And that can be somewhat misleading in that I find most small business owners aren’t getting up to the national average. Just moving from 0.1% to 0.5% would be 5 times more clients. But let me tell you, reaching 5% to 10% can be accomplished for most small business owners. That’s between 50 and 100 times more clients.

I get 5% to 10% from postcards for my workshops when my marketing message really connects with my target audience, and 40% to 60% on some of the pages on my website, and I’m showing clients how to do that all of the time.

Now, let’s look at one other set of numbers that we mentioned. Most small business owners aren’t actively managing

If, at first we just improve the marketing message so that we connect better with the prospect with our marketing, and get to 5%. That would mean that even at $1 per letter, it would only take 20 letters (5% of 20 =1), that would be $20 a lead, and if we are still closing 1 in 10, then the cost to acquire a client would be $200.

That’s not an ideal number, but we are now profitable. Investing $200 to make $300, a return on investment of 150%. At least we are starting to make money.

But now, if we learned how to cloe more sales. A good figure is 40-50%. Wouldn’t you like to close 1 out of 2?

In any case, if we were getting 5% from our marketing, $20 for a lead, and closing 1/2 of them, then the cost to acquire a client is only $40 to generate a $1,000 sale, with a $300 profit. $40 in, $300 out, 750% return on investment.

Now, do you see what I mean about

It’s not the up front cost of marketing, what you spend on the marketing, but the cost to acquire a client that’s important.

At this stage we should be asking a simple question

How many clients do we want to buy.

Everytime you spend $1 on your marketing you’ll generate $7.50 in income.

So when you send out 1,000 letters at $1 each, you’ll generate, 50 leads (5%) at $50/lead, close 25 of them at $300 each, and have $25,000 in sales, and $7,500 in profits.

At that point we don’t worry about the cost of marketing.

How many of those do you want to buy?

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