Why Tracking Marketing Metrics Can Pay Off
Join us at Entrepreneur magazine's Growth Conference, Dec. 15 in Long Beach, Calif. for a day of fresh ideas, business mentoring and networking. Register here for exclusive pricing, available only for a limited time.
We have all heard the old adage that half of all advertising dollars are wasted; the problem lies in figuring out which half.
The numbers become even more interesting (or alarming) when one examines the typical response rates for conventional (and unconventional) media.
Most direct marketers are happy to achieve a response rate of 1 percent to 2 percent -- or 2 percent to 4 percent if they include a telemarketing component. That means the recipients discard 98 percent to 99 percent of their materials without a second thought. The results for brand marketing or advertising bring even more frustration to business owners, mainly because consumers' perceptions about brands are so difficult to quantify.
Yet, every business, especially a startup, needs marketing to survive and thrive. So what can an entrepreneur do?
First, focus on generating leads over building a brand. Leads bring customers to your door. Then their experience of your product or service, as well as the reputation you develop for customer service and delivery, will build your brand.
Don't dispense with creating marketing materials that look good. But you do need to create materials that properly sell your product or service and allow you to track responses.
Remember: A great ad for your business probably won't win a Gold Lion at Cannes. But it may pay your way for a first-class ticket there.
Second, understand that most marketing and advertising campaigns are pure failure. They don't work for a variety of reasons.
So the difference between response-driven marketing and branding-oriented marketing is that you can track, test and measure the first type and adjust it until it is right for your business.
Why is it so important to track, test, and measure? You need to establish baseline performance numbers for your company in your particular category of business and then to try to improve upon them.
This is very difficult to do. Even professional marketers find it hard to "move the needle" when it comes to measuring customer response.
If you focus, though, on two metrics that most others do not, you can work your marketing and advertising in new and more profitable ways.
You'll first want to figure out a lifetime value for every new customer. That is, how much the average customer will spend at your company over the course of the business relationship.
Next, calculate the customer acquisition cost: the amount you spend to acquire a new client for your business. You never want to pay more for a new customer than you absolutely must; and you are striving for this person to eventually spend more than the initial acquisition cost so that your marketing is profitable.
For lifetime value, simply come up with a guesstimate for the value of a typical sale to a customer (say, $200). Multiply it by the number of times annually he or she will buy products (say, three times) and multiply that by the number of years the typical customer does business with you (say, three years).
The result (in the above example, $200 X 3 X 3 = $1,800) gives you an indication of the importance of setting up a repeat-business program that not only raises the amount that a person buys and the number of shopping occasions, but also extends the length of time he or she remains a customer.
For the acquisition cost, if you spend $1,000 on an ad and pull 100 people in the door, you are paying $10 for each lead. But if only 10 people make purchases, you are shelling out $100 for each sale (10 X $10=$100).
The above example demonstrates the value of boosting the rate of converting leads into actual sales, as well as targeting a level of return (at least $100) so that your campaign breaks even -- or brings in more so that your efforts truly profit.
Examining the figures makes it apparent that you can afford a "loss leader" campaign -- offering a product or service that nets a return of less than $100 -- only if you can capture that customer for the long term and pick up repeat business over time.
What's key is to use actual numbers from your own company's experience and business category to help you make better decisions about spending your precious marketing resources.
Here are five tips to help you focus your thinking to generate a better response from your marketing and more return on your investment:
- Define marketing differently. One of the simplest interpretations is to consider it communication and education. You are communicating to customers or prospects on a regular basis with actionable, sales-oriented information about your business, product, or service.
- Adopt the mindset that you're not advertising; you're buying customers. Consider your efforts a way to purchase for your business the best customers possible. That means you always market and advertise with the expectation of realizing a return in the form of new leads. If this is not your result, end your campaign and move on. But if the new leads materialize and customers purchase your products, then you have the basis for a winning campaign.
- Realize nothing has really happened until a sale occurs. You might have a great logo, a slick business card, exceptional letterhead, a killer website, and all the other props of a company, but you don't have a real business until you net customers and sales. So orient everything you do to realizing leads, sales, and repeat business -- especially the latter, which is where your profits and growth will lie over time.
- Rely on the formula: "Target, Offer, and Copy." Define your ideal, perfect customer. Then target that customer again and again with benefits-oriented offers ("what's in it for them") and marketing work that supports your sales message. Then measure the results. Profiling your ideal customer (through demographics and psychographics) and discovering the media to best target that client will keep your focus laser-like. This process alone will help you eliminate most media or at least limit your choices. Or if you plan to purchase radio or TV ads, you will be able to weed out the stations or programs inappropriate for your target.
- Test any new marketing medium first. I have seen some startups set aside $50,000 or $100,000 for an ad budget and then fork it all out for a single media campaign. It's better to take $5,000 or $10,000 and experiment first. That way, you will have enough resources left in a contingency fund to try something else if the first effort does not work. Plus, your company will be able to survive an ineffective campaign.