Waikato Business News April/May 2019

WAIKATO BUSINESS NEWS April/May 2019
15
A general manager’s bad marketing maths
It’s interesting that sometimes bad maths
sounds completely logical, even to highly
experienced senior managers.
Some time ago I met with
a general manager of a
small division within a
larger company. His division
had a strong focus on sales but
very little investment in marketing.
They had a solid client base
and very high margins, so were
strongly profitable.
While sitting in his office,
discussing a potential marketing
campaign, he explained to
me: “I have target annual revenue
of $1 million and a marketing
budget of $50,000. So,
every dollar spent on marketing
must directly bring in $20, otherwise
it doesn’t make sense to
do it”.
At first, it sounds logical.
His revenue target of $1 million
is 20 times the size of his
marketing budget of $50,000.
Therefore, every dollar spent
on marketing needs to produce
$20.
Extrapolating the logic, we
can say that if he spent money
on marketing that only produced
$7 for every $1 of ad
spend, with the $50,000 marketing
budget he would only
expect to earn $350,000 revenue
for the year, which would
be a disaster.
However, this is an example
of bad marketing maths, which
was severely restricting the
business growth.
His logic failed because
most of their sales each year
came from repeat customers,
not from advertising. They had
excellent email engagement
with existing clients that drove
sales, as well as two highly
dedicated sales reps on the road
visiting their clients throughout
the year.
The truth is that even if he
spent nothing on marketing for
the whole year, they could still
expect to have substantial sales
from their repeat customers.
So then, if business is so
good, why advertise at all?
For this business, the purpose
of advertising was to
attract new customers, who
would turn into repeat customers.
Better marketing maths
would start by asking what percentage
of their revenue was
expected from new customers
each year. For this division,
because of their strong repeat
sales, just 20 percent of their
revenue was expected to come
from new customers.
This changes the maths significantly.
The $50,000 marketing
budget is actually aiming to
produce $200,000 of new revenue.
This means every marketing
dollar spent needs to bring
in a more realistic $4 to be profitable.
This makes finding profitable
marketing opportunities
far more likely.
With the previous unrealistic
20x return-on-investment
requirement the general manager
was turning down many
good advertising opportunities
that could have easily brought
in new clients. The result was
that the marketing budget was
underspent (since very few
campaigns could come close
to meeting the performance
requirement) and the targets
for annual revenue from new
clients weren’t met, which
affected their revenues overall.
Had he used better marketing
maths, advertising campaigns
would have been placed
more often giving the sales team
fresh leads and the revenue target
for new customers could
easily have been achieved.
There’s another, even a better
way, that the general manager
could have approached the
marketing maths. It starts by
THE DIGITAL WORLD
> BY JOSH MOORE
Josh Moore is the head marketing fanatic at Duoplus, a
Hamilton-based digital marketing agency that helps clients
across NZ grow faster. www.duoplus.nz
asking, “How much is a customer
worth?”
For this business, the average
customer was worth $1650
in revenue per year. They had
high gross margins of around
85 percent, meaning a gross
margin per year of around
$1400 per customer. The average
lifetime of a customer was
more than 10 years, so each
new customer was worth on
average $14,000 gross profit
over their lifetime.
With these figures, the
general manager could have
decided that he was willing to
spend $350 to acquire a new
client. (He could have chosen
any other figure, but for this
illustration we’ll use $350,
which equates to three months
of profit from the average client).
If we spend the $50,000
marketing budget acquiring
new customers for $350 each,
we are targeting 142 new customers
for the year.
With the same average revenue
of $1650 per annum, these
new customers will bring in just
under $235,000 of revenue for
the year.
But the real return on
investment is seen in the lifetime
value of these new customers
– 142 new customers
are expected to be worth $2m
in gross profit over the next
10 years. This shows the real
benefit that investing in marketing
would bring. Investing in
acquiring new customers now,
would set up profit for many
years to come.
If he wanted to be more
aggressive with acquiring new
customers, he could choose to
increase the marketing budget
and increase what he is willing
to spend to acquire a new customer.
Since a new customer is
worth $14,000 over a lifetime,
spending $700 or even $1400 to
acquire a customer will still give
strong return on investment. It
all depends on the nature of the
industry, the aggressiveness of
the competition and whether
business cashflow allows it.
Bad marketing maths caused
this general manager to be so
restrictive on marketing campaigns
that he was decreasing
profits for many years into the
future. Instead, using good marketing
maths, businesses with
strong repeat business should
look at the lifetime value of
their clients and invest in customer
acquisition that will grow
their customer base and build
business profits for many years
to come.
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