Feeling like you can’t afford marketing for your business?
Get the down-and-dirty equation (and then the more detailed scoop) to identify the value of marketing done right—the kind that PAYS.
Are you looking at your budget, scratching your head, and trying to figure out how you can even afford effective marketing services?
Maybe you are new in business and trying to get things off the ground.
Maybe you’ve been doing this a while and just can’t see how marketing can be worth it when your customers are only spending smallish chunks of money at a time.
Here’s the thing—when you do marketing right, it PAYS instead of costs. We are talking a massive return on investment.
Still, you may be finding this hard to believe as you look at what your customers are spending—and then look at your budget. I get it.
What you need is a quick down-and-dirty equation to help you grasp the concept of Customer Lifetime Value (CLV).
So let’s do it.
Identify CLV to Determine the ROI of Your Marketing Efforts
Customer Lifetime Value is exactly what it sounds like. It’s the worth of your customers to your business throughout the course of your relationship. By predicting this value, you can know exactly where and how to spend your marketing dollars to be successful. So you won’t be spending more; you’ll just be spending smarter.
Here’s the down-and-dirty way to calculate the CLV for your customers:
Length of Relationship (average number of years the customer will spend with your business) x Yearly Value (average revenue from each customer per year) + Customer Referral Value (value of referrals to your business from each customer)
So a customer who has been with you for 10 years and spends an average of $500 a year, plus refers two customers has a CLV of $15,000. See how that works?
Of course, these are just estimates, and you can’t predict the CLV of your customers too precisely, but you can get a general idea that shows you what it is worth for you to invest in marketing to reach your customers. Being able to make smart decisions about using your marketing budget will enable you to get the ROI you need to grow your business.
So while it may be your default to think… “ehhh, I can’t afford marketing,” you can instead quickly determine your CLV to see how you truly can’t afford NOT to invest wisely in it (but only in the right kind!).
Now, let’s dig a little deeper to look at the marketing tactics that will help you spend smarter instead of spending more.
Smart Marketing: Make Your Marketing Dollars Count
Did you know a majority of small businesses are flushing their marketing dollars down the toilet every single day? It’s true. But what is it they’re doing wrong?
It turns out that most small businesses are wasting their hard-earned money on marketing tools that don’t convert. They hear about things they “should” do, and never stop to think if it’s the right move for them. And so, they do all the things they “should” do (like taking out a billboard), and then they get very little return on investment. Then, at the end of the day, they sit and wonder why marketing is so expensive.
Now, what if I told you that with a few additional tools and insights, you could take those same marketing dollars and make them work ten times as hard for you? And what if I told you it could actually decrease — yes, decrease! — your per customer marketing cost overall? Does that get your attention?
I thought so. Let’s get started.
Marketing 101: Forcing Your Dollars to Make Sense
When it comes to marketing, not all dollars are equal. In fact, major corporations look at their marketing dollars spent in terms of ROI, or Return on Investment. Put another way? They look at how much revenue they generate for each dollar spent. And the more revenue generated per dollar spent, the more successful the marketing.
Makes sense, right?
Now, to truly understand your ROI, you need a few key pieces of information. The first is probably the easiest: how much you’re spending on marketing across various channels. The second can be a bit trickier because you’ll need to understand what specific marketing tactics are driving customers to your door. Let’s look at an example:
Your total marketing budget for your lemonade stand is $100. You’re planning to market your business in the following three ways:
- Radio advertisement ($20)
- Digital campaign ($20)
- TV commercial ($60)
If you don’t have a means of tracking which customers come to your lemonade stand because of each marketing tactic, all you’ll know is you got 100 new customers for $100. But what if the only effective channel was the digital campaign? What if you could have increased your sales traffic by the same amount, and saved $80?
In this case, each new customer you brought to your door cost $1 in marketing spend. But if you’d known which campaign was going to be the most efficient (digital), you would have only spent $0.20 for each new customer. That’s a pretty big deal, right?
If each of your new customers spends an average of $5 at your stand, you can see how quickly that wasted spend eats into your revenue. You only made a total of $4, when it could have been $4.80. Talk about a pain in the pocketbook!
Marketing 201: The Importance of Digital
We just talked about calculating your ROI in the previous section, and understanding why it’s so important. But an essential part of that equation is understanding how much your average new customer is going to be worth, and being able to track how they found you.
This is where digital marketing kicks every other tactic’s bootay! Seriously, it’s no exaggeration.
With digital marketing, you know exactly how much you’re spending, and you can track each customer back to your site. You know how much traffic you’re driving versus how much traffic is actually converting. And you can track each of these new customers to understand how much they’re worth on average.
You still with me? Good.
Once you understand how much average revenue each customer generates, and how many people you have coming to visit your site, you can calculate your average customer value. Let me put some numbers in to help you understand:
- Your digital campaign generated 100 new customers, out of 1,000 digitals sent (10% conversion)
- 50 of your new customers spent $3 at your lemonade stand for a basic cup, and the other 50 paid an additional $4 for a second glass, plus candy bar.
- Based on these numbers, your average customer value is $3 + $4(.5) = $5
- This tells you that for every $3 cup you sell, you’re generating $5 in revenue. So you could spend up to $5 on selling a $3 glass of lemonade, without going into the red.
See how this works? Now let’s take it a step further…
Now that you know how much each customer is worth, on average, you can calculate your budget for driving traffic. In other words, how much you’re willing to pay to get each new visitor to your lemonade stand; even the ones that don’t buy.
To calculate that number, you multiply your average customer value ($5) by your conversion rate (10%) = $0.50. So you could pay up to $0.50 per digital click, and still not go negative. This number is your absolute bottom line.
Marketing 301: Putting It All Together
Now that you know what your metrics are, how do you go back and maximize that ROI we talked about earlier? The answer is easier than you think: target the right audience.
Remember how our digital campaign only had a 10% conversion rate? What if you could double or triple that conversion rate? Assuming your average customer value stays the same, you’d be looking at $5 x 30% = $1.50. That’s a lot more leeway to play with and highlights how critical it is to talk to the right audience at the right time. But how do you know who that is?
Here are the five things you should think about when homing in on your target audience:
- What do they look like from a demographic perspective?
- What are their goals and values?
- Where can you find them, and how are they best reached?
- What challenges are they facing, and how does your product solve them?
- What objections might they have, and who will ultimately be the decision-maker?
You may find, in going through the exercise, that your $3 purchasers look very different from your $7 purchasers. Understanding the difference allows you to better plan where to spend your dollars. Because wouldn’t you like to pay the same $0.50 to attract more of the $7 folks? Of course, you would!
Ready to Put Your Marketing Dollars to Work for You?
Let us help you jump-start your marketing program today. We’ve got loads of experience helping small businesses, just like you, drive profits through the roof. You can hit us up anytime, day or night: check out our website, or give us a call at 918-878-0555.
We can’t wait to help you kick the competition’s ass!