One of the areas I find myself asking my clients about is their advertising budget. Namely, how do you determine what you are going to spend on advertising and marketing? Why do you choose the methods you use, whether you are spending money to advertise online, print, radio, billboards or through social media? The answers I usually get are, “It seems to work,” “We've always done it this way” or “The sales rep for the magazine is very persistent.” Of course, with me being a numbers guy, these answers don't really cut it. Unless a company has unlimited resources (and if you know of one, please send them my way) it can not afford to spend money on anything, let alone advertising, without receiving a return on its investment. Luckily, measuring ROI on advertising/marketing is one of the easiest metrics to track, if you and your employees are willing to put in a little work.
Here’s how I work with my clients to measure the effectiveness of their advertising efforts. I ask them to break down their customer interactions into three categories: touches, prospects and customers. Each category flows into the next. Here is how I define each term:
• A touch is anytime you interact with a potential customer. This could be a phone call asking about a particular product, an email from the Contact Us page on your website, or a customer stopping in your place of business to browse. Your company has touched all of these people in some way. Now, when you receive these touches, the key is to find out how the potential customer heard about your business. This doesn't need to be an in-depth discussion; instead, simply instruct your employees to ask this question before the interaction is over: How did you hear about us? I'm sure we've all been asked that question multiple times, so it shouldn't offend anyone. Make sure all of your touches are recorded and sorted by source (again, web, print, radio, television, etc.).
• Now collect your prospects. These are touches that have expressed an interest in moving forward with a purchase, whether that means setting up an appointment for a consultation, requesting a quote, or simply engaging an employee in a meaningful conversation regarding your offerings. The definition of a prospect will vary by business, but most business owners know when a touch has evolved into a prospect. Again, at this point you should have recorded how this prospect heard of your business; if not make sure you do.
• The final group is your customers. This group has purchased something from your business. You can track how may of your prospects become customers. This is your close rate, and it is an extremely important number for you to track. You can also track your average dollar sale, which is the total dollar amount of sales divided by the total number of customers who bought. You will see in a minute why this is important in a moment.
Let's put all of this together in an example. Steve owns a kitchen and bath remodeling business. He decides he wants to spend $10,000 on an online marketing campaign because a salesperson gave him a very convincing pitch. Since this is a big investment for him, he decides to track all of the pieces of information I discussed above.
The advertising campaign for Steve’s business runs for one month. During that month, Steve receives 100 touches (people who contact him), 25 prospects (people who request a quote) and five customers (people who purchased from him). Those five customers generated $100,000 in sales. Sounds like a pretty good ROI! So Steve converted 100 touches into 25 prospects (a rate of 25%) and converted 25 prospects into five customers a close rate of 20%) at an average dollar sale of $20,000. All of that info gives a numbers person like me a lot to work with. We can concentrate on increasing conversion rate (turning touches into prospects), close rate (turning prospects into customers) or average dollar sale (selling more to each customer). Every one of those actions would result in more revenue for Steve’s business. But without tracking this data each step of the way, we would intuitively think the advertising spend as successful. But we would have no way to quantify it.
If I'm sitting down with Steve and I ask him why he is spending $10,000 on advertising and he responds with, “Because I can show you that it generated $100,000 in revenue over the past 30 days,” the only question I will follow up with is "Why aren't we spending more?"
But without the discipline to track (or make sure your employees track) all of the necessary metrics, you really are flying blind. And that makes a numbers guy like me shake my head. So put a process in place to track touches, prospects and customer every single day. Do the math over the contract period to see if your advertising has paid off. And if it hasn’t, try something different -- as long as you can measure its ROI.
Robert J. Rickert CPA, PC focuses on giving its clients timely, accurate and relevant financial information to help them make informed decisions about their businesses. The firm provides customized solutions to meet the specific needs of its clients. Services offered by the firm include CFO and controller services, crisis management, interim financial management, acquisitions and business buying, divestitures and business selling, litigation support, business tax services, and tax dispute assistance for individuals. For more information, visit rickertcpa.com, call 910-319-9127 or email [email protected].
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