Thursday, August 5, 2010

Simple Marketing, pt iv: How Valuable is Your Best Client?

How Valuable is Your Best Client?

Why is it important to know this figure in your marketing plan?  Because the value of a customer give you your break-even cost for an ad campaign based on how many clients your ad will bring in.  The research we've done so far gives us our optimal client's value.  Then we can start to test market our ads with an eye on calculating where you can get the biggest bang for your advertising buck.  Once you determine that, then you will use that medium exclusively.

I see you shaking your head.  You're thinking that you need to be in different media to get the widest exposure.  But why?  Why do you care how much exposure you get as long as prospective clients are beating down your doors even if you're running a single advertisement?  Eventually you'll either max out your capacity or have so many clients that word of mouth will achieve visibility for you. Or more likely, your ad will stop pulling as well and you'll tweak it.

Most businesspeople think the objective of advertising is to increase visibility, that it’s critical to have ads in as many different places at once so eventually everybody will recognize their brand.  But with a small ad budget, that's unnecessarily complicated and spreads your resources too thin. The path of shotgun advertisement leads to high marketing expense, inconsistent placement, failed tracking, and poor results.  You don’t care how many people see your ad or how many shop your offerings as a result of seeing it.  You should care only how much income the ad pulls.  One does not always follow the other.  What good does an expensive advertisement do for you if it brings in the wrong kind of customers?  Or if it has people thinking about your offering but encourages nobody to purchase?

Let the large companies worry about sophisticated branding with a variety of media.  You want to concentrate on growing your business profitably.  Concentrate on getting your message to the right customers through a single ad source.  Ensure the cash register rings each time you run your ad.  Then refine your message over time so your advertising become ultra-effective.

Calculating Advertising Effectiveness
In a previous column, we calculated your optimum segment value, the amount of annual profit a top client adds.  Now using that set of customers find the average profit from that group.  This will tell you the most you can spend on your test advertisement.  Pick a medium that has been - or if you're new at this - that you feel will be effective for your offering. 

You want to determine how many new optimum clients will a single ad run bring in?  If you’ve been advertising, you have prior data that you can use for calculations.  If not, you'll have to estimate.  You’ll refine this figure over time with live data so it isn't critical if your guess is off.

To determine your absolute maximum cost for this advertisement, multiply the average profit brought in by your ideal client by the number of new clients you expect your ad to bring in.  For example, assume your target client segment spends $5000 with you in a year and that results in $500 profit after expenses and taxes.  Because you conducted personal research, for instance, you discovered what your best clients read.  So you believe running an ad in a particular specialty magazine will result in a single optimum customer for each run.

According to this rule, the most you should spend on that ad campaign without losing money is $500.  If you haven’t been running advertising and don’t have a stream of data, you might want to figure on less per customer so as to provide a margin of error.  Realize the first few times you run a new ad you may not get any additional income!

Test run the ad knowing you may not see results for awhile.  Spend only enough that you can afford to lose without being upset if you realize poor results.  Good marketing is a calculated investment, but it doesn't need to be a risky gamble.  Be aware that every time you test a new ad campaign you risk throwing money away.  But you won't do this long term.  If you systematically track results, you'll only risk until you discover a mix that works.  Then you'll continually tweak it until you hone it so it becomes very effective for you.  That's the payoff because then you can run the ad anytime you wish and each time the cash register should ring.

So far in your marketing plan you’ve answered the four questions: you've determined your optimum client type, you know where to find them, how much they add to the bottom line, and now you know how much you can reasonably expect to afford on a single ad run.  Next week we’ll continue to explore developing an effective ad campaign.  We’ll discuss how to test your ad effectively, and how to tweak it to realize maximum effectiveness.  Later we’ll discuss how you can word it to maximize retention by enabling screening on your advertising.

In future posts I'll be offering some more innovative sales techniques.  And I’ll also be sharing ingenious sales management.  You'll be able to hand the column to your sales manager and watch company sales and morale soar.  And we'll talk more about how to lead your customers, key managers, and subordinate employees. 

If you find the content valuable and you haven't already done so, I invite you to subscribe by entering your email in the box at the top right of the site.  We'll deliver the blog right to your inbox as soon as each column is published.  And the first podcast is almost ready.  It should be available next week.

Thank you all for your patience as I respond to comments and answering questions as quickly as I can.  The volume has become overwhelming so please bear with me.  I'll do my best.  Please continue to leave comments and tell me what areas of business you want me to cover.  Until then,
profitable business All!

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