Deciding when to start spending on marketing is one of the most difficult challenges entrepreneurs and small business owners face. If you ramp up marketing too early, you run the risk of burning cash with very little to show. If you wait too long, you might be eclipsed by the competition and fall short of your goals. But the decision-making process doesn’t have to be as painful as you think. Here are a few tips to keep in mind when planning your small business marketing efforts.
To use Marc Andreessen’s definition, “product/market fit” means being in a good market with a product that can satisfy that market. Many entrepreneurs believe that it’s the single most important factor for any business, regardless of size or industry. Fortunately, you don’t have to spend heavily on marketing to prove that the product you’ve built serves the market you want to serve. Talk to your customers and reach out to your community to discover what they really need, and how your product or service fills that gap. Understanding your customers’ motivations will help refine your product and message, and give you the confidence to move forward with a strong marketing strategy.
While this approach is often easier said than done—the temptation to just dive in to the marketing pool and push forward for growth can be quite strong—it’s worth the wait. By adopting a disciplined approach to marketing, you can ensure that when you do launch a campaign, your marketing fits your product and your product fits your market.
Customer Acquisition Cost
For those who aren’t familiar with this concept, customer acquisition cost (CAC) is the average cost of attracting a new user or customer to your business. Depending on how much and how often your customers spend with you, it’s entirely possible that the cost of attracting new customers could exceed the revenue generated by them. In other words, if your acquisition cost isn’t well managed or your marketing is focused exclusively on getting in front of potential customers, it’s possible to find yourself quickly going broke. Determining your CAC will give you a reasonable idea of how much you should be spending on marketing as well as where you should be focusing those efforts.
Customer Service & Support
Last but not least, entrepreneurs have to make sure that their organization is prepared to support the resulting growth from their marketing initiatives. Far too often, businesses focus so much on product and strategy that they neglect to develop strong internal service and support teams. If the growth you’ve been chasing arrives ahead of your ability to support it, you might be able to catch up, but one bad customer experience can poison a client forever. Refining your customer support services alongside your other marketing priorities will ensure that your internal systems are working in sync, instead of at odds.
For starters, customer retention is the ability of a company to retain their existing customers over a period of time. Let’s get a bit nerdy here.
Let’s say you have 1,000 customers at the beginning of the period. You acquire 100 customers during the period, and by the end of the period you have a total of 800 customers who have stayed with you.
You can calculate the ability of your business to retain customers, also called as customer retention rate, by:
((Number of customers at the end of a period – the number of new customers acquired during that period) / Number of customers at the start of the period) * 100
((800-100)/1000) * 100) = 70% retention rate
While the ideal CRR (customer retention rate) would be 100%, it is totally unrealistic to never lose a single customer. However, to be on safer side, you should aim to achieve a CRR between 85% and 90%.
Let’s have a look at a few interesting figures:
A 5% increase in the customer retention rate can increase your profits by 25% to 95%.
Customer retention costs less than acquiring new customers, as revealed by 82% of companies.
Around 67% of returning customers spend more in their third year of buying from you when compared to the purchases made by them in the first six months.
All of that can be summed up into one statement: Customer retention costs you less, earns you more sales in the long-run, and boosts your ROI.
The decision to ramp up marketing spend has the potential to make or break any organization. While every business is different, there are core concepts that always hold true. Every entrepreneur and business owner, regardless of industry, size, or sophistication needs to understand product/market fit, customer acquisition cost, and customer service before spending heavily on marketing. Only then can you make sure that the effort and resources you put toward marketing your product or service will pay off.