Understanding ROI & Why You Need to Know
For business owners both small and large, one thing is certain; you will be contacted many times throughout your week by sales people trying to explain their products and services to you. Some may be viable, some not so much, but how do you know what to do? How do you invest in your business so that your pipeline of leads continues to grow? Sure, there are and always will be personal referrals from past jobs with satisfied customers that will come your way, but is it wise to continue to hope that will always be there?
Twenty years ago the service and home project advertising and marketing solutions were simple; Place an ad in the local shopper magazine or coupon book that was in everyone’s mailbox each week, and you were almost guaranteed lead calls. Well, times sure have changed! The publications that were the “go to” for everything home service related are now either gone or a fading skeleton of what they once were. When the print ad industry started to crumble, all those companies tried diligently to take off their blinders, go against everything the senior folks new, and dove in head first to the digital arena creating programs and emails and websites and whatever else they could think of to try to recapture lost business. This situation is very similar to the master stone mason trying to do high level electrical circuits; it just doesn’t fit. However, all that said, the worst part was the creation of all of those products and programs were done for the purpose of feeding the company’s losses and not only built with helping the client as a sole focus.
Now, as a business owner, it is more critical than ever to be educated on what to buy. The days of the trusted veteran salesperson who has been with the company for many years and has always presented ideas and possible solutions with your best interest in mind is few and far between.
We as a society are much more focused and advanced on many fronts, from buying a car to planning a trip, we research and plan and know more information going in to the purchase than ever before. Well, what about your advertising? How do we become more informed? How do we decide on what to do and what budget to allocate to it? The answers start with understanding your return on investment or ROI. With the knowledge and then planning in place to get the most out of your ROI is critical to your marketing decisions, and here is a basic process that will help you make better choices, or at least understand where your money is going.
First you must understand what an average customer of yours is worth. Now this takes a little research and may seem an overwhelming and confusing task. Let’s simplify. Although cycles change year to year and are effected greatly with what is going on in the world at that time, you can still take it all into consideration and find out your customer value. Basically start with the last year; from all customers small and large, you need to calculate what the average amount of spending is per average customer. Sound complicated? Well, it’s not. Every time the register rings it will be for varied amounts, and over multiple customers. Simply divide the total sales dollars by the total amount of transactions; make sure its transactions and not customers because you may have a customer that repeats buying from you many times through the year. Once you calculated those figures you will have your average spend per transaction. Now put that aside for later.
Now you need to estimate how many times your normal customer does business with you in a week, month, year or whatever time your business cycles. For example, a landscaper may have a customer transaction weekly, while a kitchen contractor may see the customer once every 10 years.
Having those two elements as well as the understanding of your business will certainly work.
We now have both the overall average spend per customer and also the average frequency of that customer; to clarify, let’s say your average spend is $100 and your average frequency is one time monthly; it would then be safe to say that your average customer spends $1200 per year with you.
Now that you have that golden information, you can explore many options all while asking yourself; does this make sense? Meaning, if an advertising program has an investment of $24,000 annually, you need to calculate how many customers it would take to recoup that investment. As the example we did states, you would need 20 customers over the same year to capture your ROI at even. Now what you need to ask is, can the program and deliverables get me 20 customers over the next 12 months? If that seems achievable then you are on the right path. If it doesn’t, then you need to adjust your program and investment, both higher as well as lower, all with the reasonability of “How many customers are needed”
Additionally, to create a starting budget, all that is needed is your average spend multiplied by how many customers you are targeting to get from an investment. Now here is where you need to really be reasonable and honest with yourself.
For more tips on advertising and marketing, visit casaconcierge.com or call for any questions you may have 631-401-1556….We are here to help.
