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.

The Professional Hobbyist: This person started out doing something they love as a hobby, and then they opened a business so they could get paid to do it.  They take great pride in their work.  You can recognize this person because they have all the newest and best tools and materials, and they love to show you.  They have invested quite a bit of money into their operation, and anytime the business has extra cash that could be profit, they use it to buy even newer and better stuff, even though they’re not using half the equipment they already own.  After all, they think that the capacity to do even more and even better work will eventually lead to bigger and better profits.  However, no matter how long they have been at it, their business has never shown a profit.

The Professional Hobbyist will tell me “But Dan, look at all this great, expensive equipment I own!”  Yeah, that’s great.  If the purpose of your business is to own a bunch of equipment that hardly gets used and declines in value year after year, then you’re quite a success.  If the purpose of your business is to make a profit, and it should be, then something needs to change.

The Job Owner: The Job Owner used to work for somebody else, and is now self-employed.  They usually keep costs down, have few employees, and buy equipment only when it is really needed.  Unlike the Professional Hobbyist, anytime the business has extra cash, the Job Owner takes it home, usually in the form of a paycheck.  Successful Job Owners make a fair wage for the type of work they do, but rarely, if ever, make much more than that.  The Job Owner and the business are inseparable.  If the Job Owner left the company, even for a month or two, there is no way for the business to survive.  In addition, if the Job Owner hired somebody else to do his or her work, there would be no money left for the Job Owner to take home.  The major difference between the successful Job Owner and an employee is the Job Owner takes on all the risk and all the stress with no additional compensation, and when things get tight, the Job Owner stops paying himself, while most employees would not tolerate being treated like that.

The Businessman: The businessman (male or female) understands that business is all about producing profit.  The business simply cannot survive without making a profit.  They also understand that the business owner gets paid for taking the risks, investing in the business, and being the creative force behind the business.  The business has work that needs to be done, and therefore, the business must hire people and pay them a fair wage to do that work.  If the business owner works as an employee of the business, as is the case in most small businesses and many larger ones, the businessman deserves to get paid a fair wage for the work he or she produces.  This is a necessary business expense that needs to be paid to somebody, and has nothing to do with the profits the businessman earns for owning the business.

Now, I’m not talking about how money is taken out of the business.  For example, assume that the businessman makes $75,000 per year, which is a fair wage for a certain type of work, and the business produces a $50,000 profit each year.  If the business is incorporated, the businessman could choose to take home the $75,000 through payroll, and the $50,000 through profit distributions, or she could choose to take the entire $125,000 via payroll.  Either way, the owner makes $125,000 per year, but the business only makes $50,000.  If the owner makes a fair salary, with no profits above that, then the owner is not a successful businessman at all – they are just a Job Owner, and they’re taking all the risks that go along with owning a business without being paid any more than an employee with zero risks.

So, what type of business owner are you?  Whichever type you currently fall into, the first and most important step to becoming a successful Businessman is getting crystal clear on your expectations.  Decide exactly what you want out of your business, decide that you deserve it, and fully expect it to happen.  Only then will you be in a position to make it happen.

After looking at dozens of businesses and talking with their owners, I saw a particular “economic” situation far too frequently. These businesses were struggling with reduced profits, or in some cases serious losses, due in part to a steep decline in sales. In every case, the owners told me this decline in sales was due to the economy. That’s where they’re missing the boat. What’s more, it’s the unspoken implications of this statement that make it so dangerous.

Let me ask you this. If your business has, say, a 3% market share in your region, and you maintain that same market share while the overall economy declines, then you would expect your business to decline, right? If the economy in your region, and in your industry, declined by 22%, and you maintained the same 3% market share, then I would expect your business to decline by 22%. And if the business in this example did decline by 22%, then it’s fair to say that is due to the economy. It’s fair, but still dangerous. More on that in a minute.

So what if your business, in this example, declined by 48%? It’s very simple. If the sector of the economy that your business serves declined by 22%, and your sales declined by 48%, then you did not maintain your market share. That means that more consumers are choosing to buy from your competitors instead of buying from you. You lost more business than the overall economic decline, while at least some of your competitors lost less. As the economy got worse, they offset all, or at least some of their losses by increasing their market share, and they accomplished that by taking it away from you.

That’s why blaming the economy is so dangerous. “It’s the economy” means that this situation is not your fault, and implies that there is nothing you can do about it. It’s a great excuse, but oftentimes hides the real problem – your declining market share. Your 48% lost sales breaks down to 22% due to the shrinking economy, and 26% due to lost market share. Lost market share is always a competition problem, not an “economy” problem. And you can ALWAYS do something about a competition problem.

So what can you do about it?

• First of all, stick to the facts. If you don’t know what your market share is, and you don’t have any facts about the economy in your industry for your business’ region, then admit that you have no clue regarding how much the recession is actually affecting your business.

• Recognize that some things, like the economy, are not under your control, and stop worrying about them.

• Recognize all of the things in your business that are within your control. Take some time out, and brainstorm a list. Write them down. What is under your control, or at least subject to your influence? Your attitude. Your work ethic. Your marketing message. Your position in the marketplace. Your branding. Your market share. Your product line. Your diversity. (You can take it from here, right?)

• Take an honest look at why you’re losing market share, and fix it. If you can’t be competitive, in any economy, then you won’t be in business for long.

• Being competitive doesn’t mean simply lowering prices, although that may be a part of your strategy. Don’t forget about lowering costs, renegotiating or partnering with suppliers, adding value, diversifying, etc. You still need to make a profit.

• Recognize that there is always opportunity in the marketplace. It might not be the same opportunity you’re used to serving, but its still opportunity. There were more millionaires created during the great depression in the US than during any other 12 year period in our history. Your job is to be open to it.