Before you axe your marketing communications program, consider the fact that many large corporations now treat marketing (advertising, promotions, public relations) as asset-building investments and not expense-based cost of doing business. This is likely the reason that savvy managers focus more on retention and not acquisition of new customers.
All businesses want to control cost. It’s a concern made more complicated when facing a long market downturn (or stagnation). But this is also where successful and unsuccessful marketers often part company. It is only natural to believe that during a downturn we cut expenses where we can – from the workforce, from services and things that seem frivolous from the perspective of the bottom line. For many SMBs (small to medium-sized businesses), marketing often falls into that class; perhaps not “frivolous” per se, but definitely expendable. And that’s a mistake.
Tchotchke convention giveaways look superfluous, in many cases they are, but what about your content development, website, press releases, search engine visibility, collateral materials, your sales staff? This is where I strongly recommend caution. Start with careful analysis of where you are today and trace to where you want to be in the future. Will cutting marketing expenses help or harm your future?
Tough question, if you don’t know where to look. I recommend that you begin with an estimate of the present value of your marketing program. Find the answer to these three questions:
- The value of each customer (per transaction)
- The value of your marketing outreach (per customer).
- Total value of your customers.
- The cost of reacquisition.
Value of your customer base. This is a basic calculation that all entrepreneurs and managers should do regularly. Use a simple ‘sales basis’ method: divide the total number of completed transactions per year into the gross annual sales. Bingo. Value of base.
Value of your marketing outreach. Add up the total cost of your marcom effort – website development, content creation, hosting charges, sales materials, advertising, public relations, et cetera – PLUS the cost of sales and support staff. Note that many companies exclude customer relationship management (CRM) from marketing because quality control is part of the manufacturing/design process, but CRM has a dual role in retention. Therefore, a more accurate picture of marketing outreach must include it. Finish off your calculation with a grand total, then divide the total by the total number of completed transactions. Bingo again. Value of marketing outreach, per transaction. For an even sharper view, add a second calculation for average value per customer.
Most people do the ‘old school’ thing and calculate for gross margin (total sales revenue minus cost of goods sold, divided by the total sales revenue). That calculation is valuable, but it only gives you a part of the picture. What we NEED is a total understanding of appreciation of investment in our business. When you treat marketing as purely expendable – (e.g., office supplies) you miss out on an assessed value of the company.
Picture this. Many large corporations don’t merely spend into marketing, they call it ‘investing’. Taking that idea further, it makes more sense to tally up the investment value with the return (gross sales) to find the total value of the asset (the customer).
With a good valuation of your customer base, you arrive at a clearer picture of the real value of your customers; not only in terms of what they have purchased, but what you have invested to bring them to your business.
Why is this important?
Reliance on one calculation of value is pretty silly. Gross margin only shows what you’ve managed to squeeze out of COGs without an appreciation for underlying built value of the customer base. That brings us to the fourth question – the cost of reacquisition of customers – which can be tricky.
There’s no ‘over the counter’ solution, no easy formula – no complicated algorithm (although I’d love to try to find one) that can help us find that value. You can’t merely pay a replacement cost as you would to replace a computer or piece of furniture. Replacing customers takes time AND money, which is compounded each day customers are not buying and each day you’re trying to get them back. Moreover, replacement cost increases AFTER the loss because you have to rebuild the brand promise, re-establish customer trust and re-establish the all-important positive attitudes and opinions that drew customers to you in the first place. Doesn’t it make better sense to support the investment in your customer and keep them instead?
Here’s another point – somewhere along the line we have to recognize that we can either underspend or overspend on marketing. The best tool is a good calculation of “real value” of customer base that tracks over time as often as you would calculate gross margin. Take notice when the two calculations deviate too much one way or the other.
At the end of the day, can you give up the convention pens and the cartoon buttons? Probably. Can you increase PPC or display ads? My advice is make these calculations first then make your move.