The Basics of Small Business ROI: Part 1

Posted by John Park on Sep 7th, 2008
Sep 7

Roll of the dice

Thinking BIG is hard to do when you own a small business.  There are some who may just concede to the phrase, “It takes money to make money.”  As a small business owner, you don’t have to resign yourself to small marketing budgets that lead to constrained dreams.  Instead, just apply some good old fashioned math to the way you’re allocating marketing and advertising dollars.
Having been trained initially at large corporations; gathering, analyzing and acting upon statistics and data was second nature to me.  The very thing that differentiates a successful business and a failing one is the ability of the owner to gather, analyze and act upon marketing, adverting and sales data.  These important numbers are often referred to as business trends in large corporations.  You will never find a mid-level manager meeting with an executive without them.
Now, there are a thousand ways to look at business trends.  The bottom line is that there are only a few that matter when you’re trying to determine your ROI (return on investment) for advertising and marketing.
( The Basics of advertising and marketing ROI - The DATA )
1)  COST:  What did you spend on the ad?
2)  LEADS:  How many sales leads did you get as a result of the ad?
3)  SALES:  How many sales did you close as a result of the sales leads from the ad?
4)  COST OF SALE:  What did each sale or closed deal cost you? (COST divided by NUMBER OF SALES)
5)  PROFIT or LOSS:  Are you profitable when considering the cost of the sale?
1)  COST:  $1000
2)  LEADS:  25
3)  SALES:  5
4)  COST OF SALE:  $200 (COST divided by NUMBER OF SALES)
5)  Let’s say that in this example, the advertiser is a car dealer and a sale equates to $5,000 (NET).
Conclusion:  You have a formula.  Double, triple or quadruple it in the same ad platform to grow your business.  Keep an eye on the business trends as you apply the formula.
1)  COST:  $500
2)  LEADS:  25
3)  SALES:  20
4)  COST OF SALE:  $25 (COST divided by NUMBER OF SALES)
5)  Let’s say that in this example, the advertiser is a restaurant and a sale has to be at $30 to break even.
Conclusion:  This method does not work for you.  Ignore the ad sales rep’s pleading comments about “branding”.  Cancel the ads in this ad platform.
( Important Notes )
1)  Track your numbers on a monthly basis.  It will be too difficult as a business owner for you to track old leads that ended up in a sale.  For example, if you got a lead in January, that lead goes in to the lead column in January.  If that same lead turned in to a sale in March, you will record that sale in March and not back in January.  If you are constantly running your ads, all of the numbers will reflect the reality of what is happening.
2)  Business trends should be looked at for a minimum of 3 months for you to track advertising results even if the ad was run only one time.
3)  Do not count referrals unless the referral lead or sale was the result of the actual ad or marketing effort.
( What about BRANDING? )
1)  If you value branding for your business, you need to review your business trends for at least 6 months.
2)  Don’t justify or accept BRANDING as an excuse for poor advertising or marketing results.  After all, shouldn’t branding result in sales?
These are the questions you should be able to answer if you are utilizing advertising/marketing as your primary method of acquiring new business.
1)  What is your closing percentage rate?  How many leads does it take to close a deal?
2)  What is your COST OF SALE?
Knowing the answers to these two important questions will allow you to make advertising and marketing decisions in a quick and logical manner.  Too many business owners review ad buys as if it’s a gambling decision or a simple “roll of the dice.”  It shouldn’t be.
In PART 2, I will discuss Branding and how Business Trends can be utilized to improve your business.
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