Figuring out how much you are able (and should) be investing in advertising is actually not hard at all once you know your numbers. Before we get into that, please notice my wording. When talking about advertising and marketing, it’s about investing and not spending.
This is a very important distinction. When you spend you’re looking for an immediate return on that. You spend $5 and you enjoy your coffee right now. However, with investments you are spend spend money now with the understanding that you’ll be getting more money/value back than your initial investment some time in the future.
This is where so many businesses fail in their marketing efforts. They put forth a very short, limp attempt and when it doesn’t do anything right away, they assume it doesn’t work at all. Just like the stock market you need to understand that advertising and marketing is a process, with many layers, campaign types, different objectives and return expectations.
All the big brands understand this and that’s why they have different marketing campaigns running all the time, which enables them to hit every segment of the marketplace and create a continual stream of new customers coming in to their business.
Where To Start
You need to always keep one thing in mind when doing any kind of advertising: It’s never about the initial purchase, it’s always about the Lifetime Value Of A Customer.
Too many businesses get too focused on what happens right now, while losing sight of the big picture. When we start running ads it’s normal to look at the immediate return on your investment, meaning how much money are you spending vs. how many business transactions you’re getting today because of it. That’s important to look at but it’s not the most important thing to consider.
What you need to always have in mind is what is the value of each customer over the entire time they will be with you. That means you have to not only look at what money is coming in today but also, all the money will come in the future. Each client is worth so much more than their initial purchase.
Big, successful businesses understand this and it’s reflected in their advertising campaigns. Their goal is to break even or take a small loss initially, secure in the knowledge that they will make that money back and much more from each customer over their lifetime with them. Once you know what the average lifetime value of a customer is, it’s easy to see how much you can spend to acquire them (on advertising).
Real World Example
Here’s an example from one of my clients who has a medium sized dog daycare and boarding facility.
Their average customer (not the best, not the worst, what most – say 75% or so – look like) comes in for daycare twice per week, boards their dog for one week and stays with them for about a year or so. Keep in mind this is not all their customers, just the typical one.
Dog daycare 2x/week = $80/week
$80 x 32 (weeks for 8 months of daycare) = $2,560
1 week boarding = $420
$2,560 daycare + $420 boarding = $2,980 LIFETIME VALUE of average customer
So if I know that each customer is worth almost $3,000 I will happily spend $1,000 or more to get them and still make a nice return on investment. As we run our campaigns, some will show an immediate profit, while some won’t.
Once you know what your average customer lifetime value is, it’s easy to see just how much you can put into advertising. This is the very first exercise we do with all our clients and it helps us set up the advertising budget and the metrics to focus on as we roll out our campaigns.
Keep the lifetime value of your customer in mind and remember the big picture, always.