Imagine you had unlimited resources. You could spend a fortune on advertising and guarantee an endless supply of enquiries. However, you may end up spending more on advertising than you generate in revenue from these enquiries. The net result is a loss instead of a profit.
In reality, advertising costs have to be closely monitored in relation to the amount of revenue they generate. I knew this when I started out because I had read a lot of marketing literature. All the guru’s stressed the importance of closely monitoring your results and to keep on testing adverts. But when I suggest monitoring advertising costs against the generated revenue, I do not mean immediate revenue.
Don’t make this common mistake or you will lose a fortune
When I first started I looked at how much income was generated as an immediate return from my advert. For example, if I spent say $100 on advertising I would hope to generate $1000 or more of business over the next month or so.
However, if I spent $100 in advertising and only generated $100 in revenue from a particular advertising source, I would have looked on that as a poor result.
DON’T MAKE THIS MISTAKE!
I would like to introduce you to a very important concept. It can alter how you look at your advertising spend. The concept is called:
The lifetime value of a client.
This means how much the client is worth to you in total. Not the first appointment, not the first month or even the first year. It refers to the revenue generated from this client until you are no longer in the business.
Why is this so important?
Let me give you an example. You spend $100 on an advert and it gives you an immediate return of $100. But now you have acquired a client. On average, you may find that they spend another $5,000 with you over the next 2 years. Your revenue goes up to 50 times your advert cost – an excellent return on your investment.
When you first start out you don’t have any statistics to work with but as you grow in experience you can look at your historical figures for guidance. Do your best to estimate how long you anticipate this client will be with you, how much they will spend and which ad they came from. Do your homework and you will get a rough idea of what return each advertising source has brought.
In an ideal world, we could always work on the lifetime value of the client. However, be fully aware that when you first start cashflow is of prime importance. If you spend lots of money on adverts that will pay off in the future, your business may fail because you cannot meet your bills in the present. Your advertising costs may be too high relative to the immediate return they produce.
Balance is the nature of the game here. One you have good cashflow then the lifetime value of a client increases in importance.
Vital steps in tracking your results
To successfully monitor your advertising results, you must:
- Ask each client where they heard of you (which publication or which advert in that publication if you have more than one; which internet site; word of mouth; mailshot letter; introduction from another client and so on)
- Make a note in your client database of which advertising source the client came from and the date of the enquiry
- Record the date of each advert, the wording and the cost.
- Use a spreadsheet to analyse these figures regularly. Check how much business each ad generates and how long, on average, its takes for the business to come in. Does most come in the first month? Or does it get spread over several months? Keep track of the trends to give you a decent feel for what is going on.
- Look at the overall results. Add up all your revenue, all your advertising costs and see what the overall figures are showing.
- Monitor over time the revenue coming from new clients as opposed to existing clients.
As already mentioned, results showed that my advertising costs dropped with time and more and more business was coming from existing clients. Once you have a client bank you may find that you can survive without advertising at all. This gives you somewhat more security than when first starting out.