When most people think about what marketing is, their mind’s eye leaps to creative campaigns, brands, advertisements and promotions. However, marketing covers a much wider remit than just promotional communications. In fact, these are actually one of the last stages in the marketing strategy process. The starting point for any sound marketing strategy is the financial metrics, the maths behind the marketing.
When we consider the maths behind marketing, all roads lead to ROI (return in investment). After all, if you are not generating positive returns from your marketing spend what is the point in any of it?
Return on Investment
So, what does return on investment actually mean? Well, in simple terms, it is a measure of how much better off you are afterwards as opposed to doing nothing!
If you invest £1000 in marketing and it generates £3000 profit (please note you have to measure profit and not just sales) then you have generated 3 times the return or 300% ROI.
If you invest the same money and only generate £750 profit, you are down £250, so you have only generated 75% ROI. Basically 100% ROI is the equivalent of breaking even.
You may well have heard the term “marginal gains” before. It was widely used by the British Cycling Team over the last 10 years which transformed them from the contenders to champions who dominated their sport at the last two Olympic games. It means making micro improvements in many different areas which, when combined, makes a big difference to the end result.
This concept can also be applied to your marketing strategy because there are a number of things you can do, at a micro level, which can dramatically improve the return on investment your marketing activity generates. These can be categorised into four key areas.
- Client retention
- Average annual client value
- Conversion rate
- Profit margin
We shall now look at each of these in more detail.
Key Area 1: Client Retention Rate
Small improvement in client retention can have a dramatic effect on financial performance. Imagine you service 100 customers and your average customer spends £10K per annum and your client retention rate is 70% – that is £700,000 you have in existing business carrying through to the following year. Improve your retention rate by 3% and that is an extra £30K. What’s more it will be a lot easier and cheaper to improve customer retention (or alternatively reduce customer churn), than it will be to attract £30K of brand-new clients. So, what can you do to improve customer retention?
- Improve your levels of customer service
- Introduce a loyalty reward scheme so there is an added incentive to always buy from you
- Contracts (can you tie them into multi-year agreements?)
- Added Value – are there other ways to add value to the relationship such as technology, information or 3rd party benefits which they would not like to lose?
- Satisfaction surveys – regularly audit your client base to identify unhappy clients before they leave
- Subscription models – an alternative to contracts that build up a habitual monthly purchase (think of gyms and magazines)
- CRM System – the customer relationship system itself won’t do anything but it will provide you with the tools to keep in closer contact with your clients throughout the year.
- Improve the quality of customers your take on – not all customers are good customers, and a better filtering process to ensure you attract and accept the right type of clients in the first place can positively influence figures.
Key Area 2: Average Annual Client Value
Average Annual Client Value can have a massive impact on the ROI from your marketing strategy, because if you can get your clients spending more, it dramatically reduces the reliance on attracting new clients to grow turnover. Again, marginal improvements of a few percentage, can have dramatic effects if you have a large client base. Imagine you service 500 clients in a year with an average annual spend of £5K each (so a sales turnover of £2.5m). By increasing the average spend by 5% (or £250 per customer) adds an additional £125K onto the turnover of the business. Here are some ideas in how you can improve Average Annual Client Value…
- Increase your prices – sounds simple but you may be surprised how many customers will accept it without batting an eyelid (as long as it is reasonable).
- Increase client purchase frequency
- Cross sell other products and services
- Up-sell (can you trade them up to a more premium package)
- Product development – can you introduce new advanced products which demand a higher price?
- Positioning – by positioning yourself differently against your competitors you can move yourself out of direct price comparison scenario.
Key Area 3: Conversion Rate
Out of all these four key areas we feel that conversion rates are one of the easiest areas to positively influence. However, before you address this area you need to know accurately what your conversion rate actually is. You therefore need to make sure you are tracking leads and conversion rates properly (which most companies don’t).
The benefits of improved conversion rates are two-fold. Firstly, if you improve your conversion rates you can effectively reduce your marketing spend, because you can generate the same amount of clients from fewer leads. Alternatively, you can maintain the same marketing spend and merely convert a higher percentage from the same volume of leads – which naturally leads to new client growth. Conversion rates can be positively influenced by….
- Better targeted marketing (are your conversion rates low because you are poor at closing the sale or are you not effectively talking to the right audience). This is a core principle within any sound marketing strategy.
- Sales team performance – if there are great fluctuations in how different salespeople are performing then learn and share best practice (or replace weak sales people).
- Sales process – it could be that your marketing strategy activity is getting them in the pipeline and your sales team are good, but the process is flawed in moving them along the funnel.
- CRM System – this supports all of the first three points and a well thought through system can set reminders or even automate communications to prospective customers at the most optimal times for likely conversion.
- Improve communications and collateral – pretty obvious but if your marketing collateral and communications are really good it makes the conversion process much easier.
- Improve the experience – from initial research phase to final purchase. Take a look at what you could improve to make the customer experience better.
- Make it easier to buy – are there any alternative ways that the customer could transact with you?
- Remove barriers – make sure you are not creating barriers to purchase such as technology, price, contracts, information etc.
Key Area 4: Profit Margin
The final key area which you can influence is the profit margin. Remember ROI is measured against the total profits generated, not the sales value. Therefore. logic dictates that if a higher proportion of that sales turnover is profit, then the ROI can only go one way.
For example, if a campaign which cost £5K to execute generates £15K in sales, you may think that is a good return. However, if the profit margin is only 20% then the campaign only generated £3K in profits, which means that the ROI was only 60%.
If, however, the same sales were at a profit margin of 40% it would have generated a profit of £6K, so overall a ROI of 120% – not a great performance but at least a profit. There are some simple ways to improve your profit margins….
- Simply increase your prices. As long as your costs haven’t increased as well, then your margin will go up. On the flip side, be very wary of not increasing prices with escalating costs though, as you could see your margins slowly erode.
- Reduce your costs – an obvious alternative to increasing your prices (though worth noting not mutually exclusive). Can you buy the same quality components at a cheaper price?
- Improve efficiencies – So if you are prices can’t move and your costs are as low as can be – can you work more efficiently to improve outputs?
- Eek out lower profit customers. We all have them. Hidden in your customer base will be some clients who are actually costing you money due to either legacy pricing or over servicing. Take these out the equation and your average margins will increase.
- Drop lower margin products. In any marketing strategy it is really important that you understand your margins at product/service level and not just at company level. You may well have some product lines (just like we said above for customers) that just don’t make you enough money. Make sure you analyse this so you can identify them.
Conclusion: Think of The Bigger Picture
Although we looked at these four key areas in isolation, they are all intrinsically linked. If you can find a way to take one of two of the above marketing strategies from each area and apply them to your business over the next 6 months, then the net effect it could have on ROI performance is massive. You could find yourself moving from a situation where your marketing strategy is “washing its face”, to one where it is fuelling significant profitable growth.
What’s more is that once you have a system that works – i.e. your £100K budget generates 400%+ ROI, then you know you can increase your budget the following year to achieve greater growth (all other things remaining the same). What’s more is that if you have nailed the customer retention element, that growth could be exponential! At Opportunity Marketing we are very much advocates of the belief that marketing is not about what you do (in terms of activity), it is about what it does for you (in terms of results).
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