Most people’s attitudes with paid advertising are like this – I’ll pay for as long as I have to but as soon as we can generate enough exposure via organic means we’ll switch it off.
For 10% of businesses, this is the correct attitude. For the other 90%, it’s nonsense.
Let’s start with the 10% – for some businesses, scalability is a real issue. They will never be above a certain size, and that’ great. It’s what makes them special and hopefully it’s what allows them to charge a premium. For these kinds of businesses they are not looking to grow and therefore they want their sales to be as cheap as possible. That makes sense.
However, if your goal is to scale, as it is for most businesses, then the only question worth asking is does a particular form of advertising result in a net profit or loss. That’s it. If the answer is profit, then it’s viable and the money should be spent.
Let’s put it another way. Imagine you’re a firm of solicitors and you charge an average of £1000 a month and your typical client stays with you for 9 months. That means that they’re worth £9000. Now let’s imagine your profit margin is 33%, which is a good target for a professional service company. That means they’re worth £3000 in profit. Finally, let’s imagine your conversion rate for each lead is 20%. Well 20% of £3000 is £600, so what that means is that each lead is worth £600. Or in other words, you could spend up to £599.99 generating that lead but not a penny more.
Of course in reality the first leads might cost £100 or £200, and then with diminishing returns they will get more expensive until you hit £599 and only then should you stop. Although hopefully by then you’ve worked out how to increase your conversion rate and customer lifetime value, which will mean you can keep expanding far longer.
There are three reasons why very few companies follow this mentality:
– They don’t have sufficient cash flow.
– Or they’re scared of spending money. They’d rather spend a bit less even when it means earning a lot less.
– Or they’re not in control of their numbers and therefore can’t make these calculations with any confidence.
The only valid one of those is the first – cash flow. If you’re scared of spending money then you probably shouldn’t be in business and if you’re not in control of your numbers then you need to get in control, and fast.
See you next time.