A couple of days ago a client sent me an e-mail with the following question:
“What is a reasonable cost/benefit ratio or return on investment for any marketing tools or vehicles?”
It’s a great question – and one for which I rarely see the specifics discussed outside of marketing books – so I quickly replied…
Now, as anyone who publishes a blog knows, it’s always “fun” coming up with a regular stream of new, relevant, and informative content. And it struck me as something of a surprise to find that it took me several hours before I realized what a great blog post this topic would make. So… Let’s dive in!
First of all, I was glad to see this client frame the question in terms of cost/benefit ratio and, even more to the point, return on investment.
I find all too many professionals focus on the comparative COSTS of different marketing endeavors, which are, to a large extent, irrelevant.
Of course, you always need to make sure you can afford your marketing endeavors and budget for them accordingly. But, when it comes to marketing, we’re talking about the most important aspect of your business outside the products and services you provide clients.
Marketing is an investment in the well-being and growth of your business, it’s an investment in yourself, and it’s an investment in your clients. So, there’s never any reason to be “cheap” about something as important as marketing your business.
When it comes to your marketing dollars, it’s the comparative RETURN on your investment that matters. This return on investment (ROI) is measured by the profitability of a given marketing initiative or campaign, hence your focus when choosing one marketing endeavor over another should be on their comparative “profitably.”
Now, in order to determine a marketing endeavor’s profitability, you need to calculate and keep track of your business’ average Total Client Value (TCV).
For example, if you provide professional services of some sort and your average hourly rate is $150.00 per hour and you bill a “typical” client for a total of 20 hours, then a new client is worth at least $3,000.00 to your business. I say “worth at least $3,000.00” because this formula doesn’t take into account the possibility of the client sending more referrals your way, attending workshops you might put on, purchasing additional products or services from you at a later date, etc.
Once you know what your average TCV is, then you can begin to calculate the return on specific marketing investments by tracking how many clients they bring in.
Let’s say you run a direct-mail campaign. You spend $500.00 in postage and $500.00 on stationary and supplies. You pay someone $150.00 to stuff and address all the envelopes and deliver them to the post office. And it takes you three hours to plan and write the piece you’re mailing. If your average hourly rate is $150.00, then these three hours equal a cost of $450.00… Don’t forget to include the value of your time when calculating the costs of your marketing efforts!!! So, the total cost of the campaign comes to $1,600.00.
If the mailing brings in a total of two new clients, and your average TCV is $3,000.00, then your return on investment (ROI) for this marketing campaign is $4,400.00 or 275% ($3,000.00 x 2 = $6,000.00 – $1,600.00 = $4,400.00 and $4,400.00 is 275% of the initial $1,600.00 investment).
This is a pretty straightforward formula and it doesn’t require any math other than addition, subtraction, multiplication, and division. However, you absolutely MUST get comfortable using this formula and determining the ROI of your specific marketing endeavors if you want to market your business efficiently and effectively.
This all having been said, different marketing campaigns tend to bring in different types of clients. So, to be accurate, you should track the TCV of each and every client that any marketing endeavor brings into your business to get a truly accurate picture of the effectiveness of one marketing campaign over another. But, simply knowing your average TCV across all of your clients will get you much closer than not having any idea what a new client is worth and therefore how much you should be willing to invest to acquire them.
Okay, we’re almost there… But we haven’t covered the heart of the question… What’s a “reasonable” rate of return for your marketing efforts?
Of course, what’s “reasonable” is extremely subjective and will vary across the board from one individual and one marketing medium to the next.
Personally, I look for marketing ROIs of at least 200%, and am usually not happy unless they’re in the 300-500+% range or greater. Continuing with the numbers above, if I invest $3,000.00 on a marketing campaign and an average client is worth $3,000.00 to my business, then I’m looking to acquire at least 3-6 clients from that campaign, at a minimum.
The other big factor to consider here is over what period of time both the outlay and the client acquisitions occur. And, again, what one person will consider reasonable may be unacceptable to another. If you have a relatively healthy bank account, spending $3,000.00 or more up front on a year-long marketing campaign that will drip an additional client or so into your business each and every month is definitely worth the investment. However, someone who has to take on debt in order to make that kind of initial investment will likely need to see a greater return much sooner in order to cover their costs.
In the end, you need to always be trying different marketing strategies and carefully tracking the results of each. Some marketing endeavors will take longer than others to provide conclusive results. So don’t be too quick to judge… You need to give your investments some time to work.
But you always want to be dropping any marketing endeavors that aren’t at least providing a positive rate of return and then allocating your resources according to those that perform better than others. And, considering that things are always changing, you need to make this process an ongoing part of your business.
I hope this helps you decide how best to invest your marketing resources and determine what’s reasonable for you.
Let me know what you think – please leave a comment down below…
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