As a marketing consultant, I regularly see businesses make a big mistake by not taking into consideration the value of repeat sales when they review the performance of their advertising and measure its profitability.
Determining whether your advertising is working (is it profitable?), you need to look at advertising as a long-term investment. When evaluating your advertising, you need to take into consideration repeat sales from each new customer your advertising produces. Nearly all businesses earn the majority of their sales and profits on repeat sales, not first time sales. Understanding this concept is one of the secrets to building a successful business.
For example, let’s say you run a small quarter page ad in your local community newspaper. This small ad costs you R2 000. From this single ad you attract five customers who each buy R300 worth of your products. From that information you would think that you had a loss of R500 on that ad because you paid R2000 for it, but you only generated R1 500 in sales. However, upon scrutinizing the long-term effect of those five new customers, a whole new picture emerges.
Let us say that each of those five new customers purchases an additional R600 of merchandise from you over the next 11-months. When you take that into consideration, your R2000 ad has now generated R4 500 in sales. What if each of those five customers purchases an additional R1 000 of merchandise from you the following year? Now, your original R2 000 ad has generated R 9 500 in sales over a 24-month period. Suddenly your return on your advertising investment is looking very positive.
That is why it’s essential that you view the profitability of your advertising on a long-term scale, yet most advertisers tend to judge their campaigns after one or two adverts. It is a sure-fire recipe for failure. The goal of advertising is to generate long-term customers and repeat sales. Your objective as a business owner must always be to generate faithful repeat customers, not one-time sales.
Let’s now add the amazing power of referrals to your advertising strategy. What if two of your five new customers valued your products so much that they told two of their friends about you and these two friends each become long-term customer of your business. What if those two friends each purchase a few thousand rands worth of products from you over the next two years? Are you seeing the positive result and the tremendous long-term value of that initial R2000 ad you placed?
I hope that this gives you a better understanding of advertising as an investment. It is essential that you track the source of every new customer. Whenever you talk to a new customer you must ask the customer “how did you hear about us?”, then you need to track the source of that customer and measure how many sales that customer makes over time. One of the key drivers of business growth is to have a clear sense of the lifetime value of a customer.
Figure out what a customer is worth to you over a purchasing lifetime, the total aggregate profit that each customer can generate for you, minus all advertising, marketing and service expenses.
In summary, before you discard your advertising strategies because they are not immediately generating a profit, you must first test, measure and understand the value of a new customer over time. Stop looking at advertising as a quick-fix and short term expense. Start viewing advertising for what it really is, a long-term investment and when managed correctly can dramatically grow your profits.
If you want help with your marketing, branding and advertising, then call me today. Nobody can negotiate better media deals for you. I’m talking about improving and guaranteeing your returns by over 33% for the same current investment that you make.
John Lloyd is a business growth strategist, award-winning marketer, speaker, trainer, columnist and author of the book Smart Thinking for Crazy Times.
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