On one hand, marketing is an expense that needs to be controlled, just like all of your other expenses.  On the other hand, marketing is an investment, and the more you spend, the more you make.  Should your marketing costs be firmly budgeted, or should they be maximized for the greatest amount of sales in the shortest period of time?

Maximizing Marketing ROI

There’s no room for guessing here.  If you measure all the key aspects of your marketing, and you know, with certainty, exactly what your marketing return on investment (ROI) is, and you know your marketing generates a real profit, then your marketing costs should be approached very differently from the rest of your expenses.

In this case, you KNOW that every time you spend a marketing dollar, for example, you get $2.00 back.  Why would you want to limit yourself to $1000 when you could spend $100,000, or $1,000,000, or $10,000,000 and make that much more money?  When you’ve got a strong ROI, you’ve still got limitations.  In this case, you would limit your marketing budget based on your ability to cash flow the costs, your production capacity, and your ability to handle both known and unknown risks.  For example, in 2005 investors were making fortunes flipping properties – until the market changed.

Trial and Error

Many small businesses, however, do not have their marketing machine this finely tuned.  I was speaking with one of my clients last week, and when I asked her about her marketing efforts, she described the various ads she was running.  When I asked her which ad was most effective, she told me she didn’t know, because “that sort of thing is very difficult to track in this industry.”

If that sounds familiar, let me make 2 things very clear:

1. If you pay for advertising, you cannot afford ignorance about your marketing results, and
2. Without a system for measuring results, tracking things like this is very difficult in every industry.

We’ll look at some simple ways for tracking advertising results in a later post.  For the purposes of this budgeting discussion, I just want you to understand that spending money on advertising when you don’t know your ROI is one of the most common reasons businesses make so little profit.

If your business is in this position, here’s what you need to do:

1. Freeze your marketing budget right were it is. Don’t cancel your current advertising, and don’t spend even one more penny on additional advertising, no matter how much of a great deal it is that expires by the close of business tomorrow.
2. Put a plan in place, with a short deadline, to test and track your results. If you don’t know how, then bring in someone who does know how for some temporary help.  If you do know how, then why haven’t you done this already?  Most likely, it’s because you’re working so hard that you don’t have the time.  If that’s the case, you need to bring in someone who does know how for some temporary help.
3. Set a maximum marketing expense as part of a comprehensive budgeting process, and stick to it. This amount should be no more than you are currently spending, and in most cases should be less.  It should be low enough that, unless you are a recent start-up, should allow you to show at least a small net profit.  When it’s time to to test another advertising medium, pay for it by eliminating something already in your budget.
4. Once you know your average ROI, use it. This becomes your benchmark.  Change or eliminate the peices that provide the worst ROI, and replace them with something better.  Over time, your average ROI will improve, making you more and more profitable.

So what’s a hole?  Remember that nobody buys a drill because they want a drill.  They buy a drill because they want holes.  The “hole” is the solution to your customer’s problem.  The “hole” is what you should be addressing in your marketing, not the drill.  The hole is what your customer is really looking for.

So is your marketing plan focused on the drill, or is it focused on the hole?  While it might be possible to get somebody who doesn’t need holes to buy a drill, your job of selling drills will be a whole lot easier if you first find people that need holes.

Would you like to increase your sales?  Take a step back from your business and figure out what problems your customers are trying to solve when they do business with you.  If there’s more than one problem, which is most important?  Which is most urgent?  How does this problem make them feel?  Which one is causing your customer the most pain?  What kind of pain is this problem causing?  What are your customers willing to do to make that pain go away?  When you understand these things, you’re well on your way to understanding your customer.

Now take a look again at your marketing plan and your advertisements.  How do you capture the attention of people with the same problem?  How well do you address the issues that are most important to them?  What kind of offer do you make to solve their problem?  Forget about trying to sell more drills.  Just find people that need holes, and help them out!

It was no surprise that over-valuations ran rampant, but what I was really glad to see was the care that the sharks took in determining the percent of ownership they would accept.  It was really quite simple.  If the shark thought the concept was profitable enough and the entrepreneur had a good grasp of the critical variables that need to be controlled for the business to succeed, then the shark would accept a 50% ownership share.  If the entrepreneur did not understand their critical variables, the sharks required at least 51% ownership before they would invest.  Obviously, they wanted the controlling interest to protect their investment from the entrepreneur they were partnering with.

In the worst cases, the entrepreneur was not only lacking insight into how their own business would function, but they vigorously defended their ignorance.  In these cases, there was no middle ground for the sharks.  They either wanted nothing to do with the business, or, if the concept had enough value, they would offer to buy 100%, take it or leave it.

So, if you went in front of the shark tank today, with your current business, how would you fare?  Would the sharks be comfortable investing in your business with you calling all the shots?

Maybe they would, maybe not.  If not, it’s because you’re missing some key components that are critical to your level of profitability.  If it’s not good enough for the sharks, don’t let it be good enough for you.

Use these simple steps to gain control of the profits in your business:

1. Identify the critical variables in your business
2. Implement a system to measure those variables
3. Track those measurements
4. Use that information in your decision making

In most any market, following the laws of supply and demand, a sale does not occur until we have both a willing seller and a willing buyer.  In short sales, however, a willing buyer and seller are not enough.  For a short sale to proceed, the seller’s bank must approve the deal after the buyer and seller have agreed to the terms.  Let me describe a recent sale to illustrate my point.

After the house had been on the market for 6 months with another company, the seller approached us and asked if we could help.  The short sale situation was pretty clear – the seller’s income had gone down significantly, he could no longer afford the house, and he was behind on his mortgage payments.  The value of the house had declined with the market, making it impossible to sell the house for a price that would cover the mortgage payoff.  We listed the house for sale and immediately began working with the lender on a short sale.

That spring we got a good offer from an interested buyer and put a deal together for the bank.  Not one of those “let’s offer $150,000 for a $700,000 house and see what happens” offer, but a good, solid offer, about as good an offer as you could expect for the market conditions.  The buyers were qualified, serious, and the price was good.  The bank said “no,” and refused to even give a counter offer.  The buyers did what most people would do – they bought another house.

The months passed, and the real estate market continued its decline.  That fall another serious buyer came along, with another good offer.  It was $45,000 below the spring offer, but right in line with the current value of the house.  Again, the bank said “no.”

By the next spring, the bank had not received a single mortgage payment in over 19 months.  The third offer came around that time, but this one was a real low-ball.  This time the bank made a good decision when they said “no.”  A short time later, the fourth offer came in, exactly $100,000 below the first offer from last spring, and the bank finally took the deal.

We could talk about the wisdom of the bank clerk 3000 miles away that made the decisions to hold on to the house during the entire price decline, and then sell only after prices stabilized, and we could talk about how badly the banks needed our bailout money, but this story is not about one house.  It’s about the market in general.  More and more, banks are finally letting go of their short sales and foreclosures, clearing out one of the final obstacles to recovery.

The vacant house gets painted, cleaned, lived-in, and cared-for again.  Flowers get planted, furniture gets purchased, and people get invited over, buying a bottle of wine as a gift on their way over.  One by one, in neighborhoods and cities across the country, that’s what pushes the economy back to recovery.

I was affected by this recession just like everyone else.  I experienced reduced sales, reduced income, evaporating profits, higher debt ratios and business losses.  In one case, the losses were enough that I chose to close one of my businesses.  These are not the sort of things I enjoy.

Most mornings I get outside, before the heat gets too intense, to excercise and meditate.  As a regular part of this ritual, I spend some time deliberately focusing on things that I’m grateful for.  Usually its things like my wife, my family, my health, the resources available to me, the friends and mentors in my life, my success, my business.  This morning, as I was going through these things in my mind, really feeling the gratitude growing inside, I started thinking about the recession.  I don’t know where it came from, but as I started thinking about all of the positive outcomes I’ve seen as a result of this recession, I realized there was quite a bit to be grateful for.  Here’s how I started my list.  What am I missing, and what would you add to this list?

I’m Grateful for this Recession because…

1. it prompted me to re-evaluate my priorities, giving me a clearer sense of which things are most important in my life, and helped me to re-focus on those areas.
2. it forced me to look for new opportunities in new places, opportunities I would never have seen otherwise.
3. it gave me a greater appreciation for what I have achieved.
4. it made the weaknesses in my businesses quite apparent, so I could address them.
5. it provided the stimulus I needed to learn and grow in areas where I had become complacent.
6. it reduced the competition in the marketplace, providing greater opportunity than before.

“Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.” ~ Napolean Hill

Just one word of warning – don’t get so caught up in the creative side of your advertising that you lose sight of your core message.  After all, if your ads don’t make an effective offer to the consumer, then you’re really paying for brand recognition, and most small businesses can’t afford an effective brand recognition advertising campaign.

For some examples to get your creative juices flowing, check out this video:

I took my wife to Swirls, a little cafe on Race Track Road in Tampa.  When we walked in the young man behind the counter, Andrew, asked us how we were doing.  I gave a standard reply, something to the effect of “great, how are you?” to which he replied “I’m amazing!”  What really grabbed my attention was his sincerity, his certainty, his excitement, and his energy.  It WAS amazing, and it was contagious.

As Laura, my wife, began to order her coffee, he told us that everything was very good, and he would be happy to make us anything we wanted, but he was a master with the cappuccino machine, and cappuccino was his specialty.  “In fact,” he said, “I make the best cappuccino you’ve ever tasted.”  Once again, it was his unbridled enthusiasm, his sheer excitement, that was so compelling.  He was so excited, in fact, that he didn’t sound arrogant at all.  Well, of course we ordered the mocha cappuccino, but we did so without even asking the price, which was completely out of character.  We just HAD to try it.

When I asked for advice on the pastries, he got this far-away look in his eyes, and moaned with pleasure.  “The brownies are amazing.  I mean, everything is very good, but you have got to try the brownies.”  Then he closed his eyes, I think to enjoy his imaginary brownie.  When someone else suggested the white chocolate raspberry strudel, Andrew didn’t make a sound.  He just looked at us with a sparkle in his eyes and mouthed the words “try the brownie.”

Well, the cappuccino was incredible.  I liked it, and I don’t drink coffee.  But Laura has had cappuccinos in places from Little Italy, New York, to Rome, Italy, and many other places, and IT WAS the best she ever had, and the brownie was simply amazing.  Now, if a typical consumer gets the best cappuccino she’s ever had from your business, from an average server, she’ll most likely become a repeat customer.  She’s also more likely to refer her friends and family.  And if she gets just an average cappuccino with the best, most enthusiastic service she’s ever had, she’s still more likely to be back again and again, and to refer her friends and family.  So just imagine her reaction when she gets the best cappuccino she’s ever had, served by the best, most excited server she’s ever had.  Do you think that impacts your customer loyalty?  That’s what I mean when I talk about a RAVING FAN.

Talking to the owner’s daughter, we found out that Andrew had worked for a major coffee chain for three years, and Swirls hired him after he had been downsized.  Apparently his old employer realized they wanted him back, but Swirls recognized a great asset when they saw one, and worked hard to keep him. In addition to making a great cappuccino, he seems to know a lot about creating strong demand for his services in a difficult economy.

So, let me ask you, when someone comes to your small business, what sort of experience do they have?  Do they have a good experience for a fair price, or do they encounter an energy and excitement so contagious that they don’t even think about the price?  Do you meet their expectations, or do you exceed them so well that they can’t wait to tell everyone they know about you and your business?

Don’t just take my word for it.  Next time you’re in the Tampa area, stop in at Swirls for a mocha cappuccino, and see for yourself.  And don’t worry about asking for Andrew – you can’t miss him.

4) I Know Everything I Need by Looking at my Bank Account Balance

It’s amazing how many times I’ve heard this!  Sure, your bank account balance is important, but you can’t manage your business effectively without additional information.  If your balance is getting higher, does that mean you’re more profitable?  Maybe it just means more of your bills are going unpaid, or you’re collecting on more of your past due receivables.  Maybe it’s just a reflection of better payment terms extended from some of your bigger suppliers, or maybe a vendor misplaced a large check you wrote, and you’ll be in deep trouble when they find it and cash it.  A declining bank balance could mean declining sales, but could happen just as easily during strong growth, when you’re spending more on materials to meet increasing demand.  The bottom line is that the bank balance by itself means very little.  To make effective decisions, it must be considered in conjunction with the changes shown in your other assets, liabilities, sales, and projected cash flows at a minimum.  Spend some time getting to know your balance sheet – it’s got your bank balance on it, as well as information on all of your other assets and liabilities.  Once you get comfortable with it, you’ll find it’s twenty times more helpful than your bank balance alone.

5) Watch All My Expenses, I Don’t Need a Budget

When it comes to budgeting, there are only two types of business executives.  One type uses self-adjusting budgets and regular budget variance reports to manage profits at a peak level, and the other type doesn’t understand exactly what this type of budgeting is or what it can do for your bottom line.  Which type are you?

6)      I Can Fix Anything By Increasing My Sales

This is the BIG ONE.  It incorrectly assumes that all sales are profitable, and that all financial problems are related to income.  Think about this for a minute: In the US, most people that win a lottery are broke before they win, and they’re even more broke after they win!  If being broke was an income problem, then the additional income provided by winning the lottery would fix the problem, but it never does.

Don’t get me wrong, increasing sales is usually a great thing.  But if your sales are driving revenue to increase by 20% per year, and your costs are increasing by 40% per year, you’re on the fast track to financial disaster.  Increasing sales will not help production issues, quality control problems, logistical errors, customer satisfaction issues, or a host of other problems, and in most cases, increasing your sales will make these problems worse.

Don’t put the cart before the horse.  As long as you have a reasonable level of sales (maybe not enough to reach your current break-even point, but enough to reach a reasonable break-even point) you need to work on your profitability first.   It’s a lot easier, and less expensive, to do this now and increase sales later than the other way around.

Link to part 1 of this post

If you’re in business for yourself, whether you’re planning your grand opening or a 25 year veteran, I wanted to take a few moments to discuss your expectations.  Science has shown that our expectations can have a significant effect on the outcome of an experiment, which is why scientists prefer double blind testing.  That’s every bit as true for the entrepreneur as well.

Many people are just looking for an income, and the concept of business seems so simple – buy low, sell high.  The purpose of a business is to generate a profit, and most people, especially business owners, think they understand that.  But there are a few assumptions, or traps, that get in the way of far too many business owners.  They really seem like common sense, which makes it so easy to fall prey to them.  Don’t let them destroy your profits.

1) I’m the owner, I don’t need a salary.

This cuts right to the core of what it really means to own a profitable business.  The successful business owner deserves to get paid for investing in the business, taking the business risks and being the creative force behind the business, whether she or he actually works in the business or not.  In addition, all employees of a business deserve to get paid a fair wage for the work they produce.  You would not expect an employee to continue working for your business if you stopped paying them, would you?  If you’re a business owner and you work for your business, you should get paid just like all of your other employees.  Conversely, if you do get paid a fair salary, and there are no profits at the end of the year, you don’t own a profitable business.   You might own a good job, but that’s not the same thing as a profitable business.  It is far easier to sell a business than a job when the time comes, and often selling “the job you own” is downright impossible.

2) Gross Profit is still profit.

I prefer the term “Gross Margin” over “Gross Profit” because I’ve seen too many business owners confuse gross profits and net profits.  “Gross Margin” is your revenue minus your direct expenses.  “Net Profit”, or simply “Profit”, is your revenue minus all of your expenses.  If you’ve paid your direct expenses, but you have not paid your overhead, it’s not profit!  I understand that it’s a whole lot easier to tell a business analyst that you’re making a 30% profit instead of showing a 2% loss, but you’re not fooling anyone but yourself.  If you haven’t factored in ALL of your expenses, it might be gross profit, but it is not profit.  You cannot fix a problem until you acknowledge there is a problem.

3) Cash Flow just means Profit, right?

Wrong.  Profit means your total expenses were less than your total income, but remember that profit is not always in cash.  Profit is sometimes visible as an increase in your bank account balance, but it can also be seen in other areas, such as an increase in your accounts receivable, an increase in your long term assets, or a decrease in your debts.  Cash Flow is all about when the money comes in, and when it goes out.  They are two separate things.  A profitable business that does not have the cash it needs to pay its bills can go just as bankrupt as a company with steady losses.  That’s why it is so important to manage both your profits and your cash flows.

Click to go to part 2 of this post

I want you to think back to the spring of 2006. Imagine yourself going back in time. Before the election, before the recession, before the bailouts. Now imagine, in 2006, that you need a new bank. How do you choose one? For some people, it’s the convenient location of the nearest branch. For others, it’s the friendly, personal service. Maybe for you the extra half percent they offer on their savings accounts, or the number of branches in town, or the interest rates on their loans, or their ability to approve your loans is more important. Whatever it is, you have a specific strategy you use, a set of criteria, to choose which bank you do business with.

In fact, you have a list of criteria, somewhere in your mind, ranked in order of importance to you. When you choose a bank, you might only pay attention to the number one most important item on that list, while others might use the top 3, 4, or 5 criteria.

As I listened to the radio back in 2006, I heard a lot of commercials for local banks around town. Most of them, as far as I can remember, had something to do with mortgages or home equity loans. For example, a home equity loan from our bank can put your kids through college, or get you that boat or vacation you’ve been wanting. In other words, a loan from Bank X can make your dreams come true.

How would you have reacted to a commercial for a bank that basically said “let us take care of your money, so you know it will be safe.” I you’re like most people, the criteria “A safe bank that is not at risk of going out of business soon” was way down on your list, like number 462. Back in 2006, everyone thought every bank was so safe that most people never even considered the possibility of a bank going under.

Even in early 2008, when the Federal Reserve stepped in to help prevent Bear Sterns from collapsing, the average American paid little attention. It wasn’t until October that everything changed, when the effects of the recession were front page news every day, and the President of the US announced a $700 Billion bailout package. That’s when every Joe and Jane in the US suddenly realized just how serious the recession was, and how real the risks facing American businesses were. That’s when every American consumer started re-prioritizing their list.

If you were choosing a bank at the end of 2008, your most important criteria was probably the stability of the bank itself, and therefore, the safety of your money. The extra half percent interest you looked for a few years ago was not important anymore. So what happens when Bank X continues to advertise that extra half percent interest?

In early 2009, I heard a new commercial on the radio for Suntrust Bank, unlike any banking commercial I had ever heard. The entire commercial was build around a single word – SOLID. Someone at Suntrust was obviously paying attention. They knew that their typical customer, now filled with fear about the economy, had re-prioritized their list. Potential customers were using a completely different criteria to choose a bank, which rendered Suntrust’s old commercials, as well as every other bank’s, completely irrelevant. “Suntrust – Live Solid. Bank Solid.” The implied message, always more powerful than a message stated outright, cuts right to the center of the consumer’s fear. Suntrust figured out what was relevant to consumers TODAY, updated their marketing message accordingly, and moved ahead with a very successful marketing campaign.

So how do you keep up with your customers’ purchasing criteria, and when do you change your marketing? Just ask your customers. Run surveys regularly. Pay attention to what they say, and more importantly, what they do. If a marketing message is performing well, and providing a nice return, don’t change it. If it lasts for 20 or 30 years, and keeps working, great! When it ceases to work as effectively as it should, find out why. Measure the criteria people are using in the current market, and update your message accordingly. If your message does not address at least one of the top three criteria people in your target market use to choose your product or service, then don’t waste your money advertising that message. Make every advertising dollar count.