Without a long-term perspective, you might be tempted to cut your marketing budget too early. But making this decision too fast might block your marketing from ever bringing predictable results.
Companies that overspend on marketing typically don’t end well. But if you’re wondering whether you’re spending too much, you must look at the broad picture of your business.
In the broad picture, marketing takes time to give returns. It will usually take longer than you’ve expected for your strategy to start working.
To estimate how long it might take, you need to think beyond costs and income. On average, how long does it take you to close deals with new customers?
How to multiply your company’s revenue in long term marketing strategy
An important part of healthy cash flow is predictable, continuously growing revenue.
As many founders you might picture growing revenue through regular, loyal customers. But finding and retaining great loyal customers is a great challenge.
Not many companies succeed at that challenge. Those that do typically see great growth thanks to it. What you see in unicorn startups and most mature companies.
But the reality in most companies is rather different. They lose customers because of simple mistakes
- like being slow to respond, or pushing too hard for a new deal.
Let’s say that the offer and pricing are valid, but sales don’t increase at the same time that you increase spending on marketing. What should you do?
It’s definitely not a signal to quickly relocate your budget. You’ve increased your costs, but if you picked the right strategy for your company, then long-term profits should be much larger than immediate costs.
That’s why you should analyse ROI from your marketing in a much broader timeframe.
What can help you analyse your marketing spending?
There’s a limit to how much you can pay for new customers
The cost of acquiring new customers can’t be larger than the potential value of your customers. David Skok (serial entrepreneur, venture capitalist) wrote about it on his blog.
He stated that it’s easy to kill a company with high cost of customer acquisition.
Business model viability, in the majority of startups, will come down to balancing two variables:
1. Cost to Acquire Customers (CAC)
2. The ability to monetize those customers, or LTV (which stands for Lifetime Value of a Customer)
If the potential income from your clients is lower than what you’re spending to acquire them, you’re probably in trouble.
What goes into calculating your Customer Acquisition Cost?
I found a great definition on the Kissmetrics blog:
Basically, the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.
The size of CAC that you can afford depends on how big the lifetime value of your customer is. It’s not hard to calculate your current costs and arrive at useful conclusions.
But I want to draw your attention to the second part of the above definition – “the number of customers acquired in the period the money was spent”.
There’s a hidden problem here, because in the niche markets that most medium or small companies operate in, marketing rarely generates immediate sales effects.
And in a way, the time it will take for marketing to generate results depends on your LTV.
That’s because the LTV is a representation of how much potential income is behind your customer. But the more your customer has to spend, the longer he will take to sign the deal.
What is the average time in which you can acquire new customers outside of your network?
Or simply your average deal closing time. It might be hard to precisely determine your CAC without knowing it.
Is it a problem?
The average deal closing time for a large software development company is 6 months. In case of this type of companies, this is how a cold email lead generation campaign works in our experience.
Despite sending 300 emails in the first month, new sales don’t appear in the same month. If you analysed costs against returns from this strategy in this month only, you wouldn’t be seeing the full picture.
But when you know the average closing time, you know when to expect new deals from your marketing. It gives you the broad picture for better analysis of marketing spending.
It’s easy to mistakenly assume that marketing isn’t working. But it’s dangerous to do that when your strategy is still in its opening period. It might happen that the average deal closing time passes, and your strategy still won’t generate results. But that’s the only real sign that you should stop investing in it.
Remember about the average closing time
If your offer is solid and you are regularly generating leads, you will close new deals. A new marketing strategy should increase your sales results, but it will probably happen after your average deal closing time passes.
Without knowing that time, it might be hard to analyse your marketing returns correctly. Because – simply put – the dollars you spend today might return to you at a later time than you expect. And remembering that should help you make better decisions.