How do you decide how much money to spend on marketing? Is it an expense or an investment? And what happens to your marketing budget when you have to make cuts? Drayton Bird looks at marketing spend and asks, “how much is a customer worth to you?”
Let's talk about money.
Specifically, what your marketing costs — and what you get in exchange.
Some people talk about marketing "spend". Others talk about marketing "investment".
You'll probably agree that those who see it as spend are more likely to make it one of the first things they cut down on when times are hard. Those who see it as investment are less likely to do so.
Well it is an investment — and a wise one. Firms that spend more on marketing are on average more profitable than firms that don't.
What's more, firms that keep spending when times are hard tend to emerge even stronger than before — for a simple reason: they have a greater "share of voice" when an industry is spending less as a whole.
Of course, many firms may talk about marketing as an investment — but not mean it. They wish to sound as though they're thinking intelligently about it, but they don't really mean it.
Take the subject of what you lay out and what you get.
How do people work it out? In many ways.
A firm might take a percentage of turnover or overhead as the right marketing budget.
Many, though are led by expediency. Recognise any of the following?
"We need more sales volume; let's spend more money."
"Last year we had a good year. Put up the budgets!" — or vice versa.
Professional direct marketers (many are not, unfortunately) think first about what they are really investing in.
So the big marketing question is, "how much is a customer worth to you?"
If you've been in business for a while you can measure how long customers stay with you, and how much profit they provide in that time.
Then you discount the sum to determine what you can afford to recruit and retain a customer, allowing for a profit.
It is true that some sales are not repetitive, but in those cases you can often, if not always, cross-sell other things.
The importance of customer value came home to a client who sold what they call an fmcg (fast moving consumer goods) product in Britain — and packaged goods in the U.S.
He asked me, "If the gross margin on one sale is 80 pence, how can I afford to send out direct mail at 100 pence a time?"
I asked him if he knew the average value of a customer over time — not just one sale. He said he'd never given it a thought.
And I said, "You can easily afford it if you know your average customer buys 200 packs a year and stays with you for five years — and you think not about making an immediate sale, but making and keeping a customer".
He became my largest client.
The same principle applies if you work out how many cars you can sell a customer over a lifetime. You can afford a series of very expensive direct communications — DVDs, books, lavish mailing packs and so forth.
But it all starts by thinking in terms not of expenditure, but return on investment, and taking a lot of trouble to try and assess what a customer is worth.