“Will this marketing approach be worth my while?” It’s a question independent professionals often ask. But there’s a related question that, unfortunately, they ask much less often: “How much will it cost compared to what it brings in?” Surprisingly few professionals know the answer to this crucial question, and many admit it had simply never occurred to them.
What are your costs?
Every marketing approach has a set of costs attached. Display ads, pay-per-click campaigns, and trade show exhibits come with a price tag. Association meetings, networking mixers, and business lunches have registration fees, incur food and travel expenses, and take up your time. Websites, brochures, and flyers consume time and money to design, launch, and print. And so on.
But what is the relationship of this spending to the new business it’s intended to generate? How much does a new client really cost? Let’s explore some examples. This will require a bit of math, but don’t let that scare you off. Instead, pull out your calculator and follow along.
If it costs you $250 in marketing expenses to land a $250 sale, is that a worthwhile investment? Some professionals think it is. For some reason, they don’t see that this means they are working for free. Instead, they mistakenly believe they are breaking even.
Let’s factor in your direct costs for delivering your product or service — those expenses you only incur once you make a sale, and which aren’t reimbursed by your client. Depending on what you do, this might include inventory, supplies, gas, parking, phone charges, out-of-town travel, space rental, audiovisual materials, processing fees, shipping, subcontractor labor, your assistant’s wages, or credit card fees.
Then if your marketing expenses total $200 to make a $250 sale, and your direct costs for delivering that product or service total $50, now it is worth it? The answer is still no. You’ve been reimbursed for your costs, but you haven’t yet been compensated for your time.
What if costs you only $100 in marketing to make a $250 sale, your direct costs are $50, and it takes three hours to deliver the product or service? Now is it worth it? Only if you value your professional time at less than $33 per hour. ($250 minus $150 equals $100, divided by 3 hours equals $33 per hour.)
In the example above, your direct cost of sales has been covered, as has your marketing cost. But your hourly rate still needs to pay for all your other business expenses, health insurance, taxes, and the myriad other financial components of being self-employed. If you can work for $33 per hour, pay your expenses, and still have enough left over to live on, you can afford to pay $100 for a $250 sale. But if you can’t, that kind of marketing will quickly make you go broke.
So far, we’ve been looking only at the hard costs of marketing — what you pay money for. But many marketing approaches also take a considerable amount of time. What’s the cost of that? Here’s a quick way to find out.
When does it pay off?
Let’s say you want your business to bring in a total of $80,000 in revenue this year, you’d like to take four weeks vacation, and work a total of forty hours per week. $80,000 divided by 48 weeks equals $1667 per week, divided by 40 hours equals $42 per hour. That means every single hour you spend working in your business, you need to be earning $42. If you spend an hour on marketing for which you aren’t being paid, that’s $42 you’ll have to earn at some other time.
If you spend four hours marketing to land a $250 sale, and it takes three hours to deliver the product or service you sold, you’re only earning $36 per hour. At that rate, you’ll never be able to make $80K. You’ll either top out at $69K ($36 multiplied by 40 hours, multiplied by 48 weeks equals $69,000), or you’ll have to work an extra 6 hours per week to make up the difference.
Okay, I know this a lot of math to follow, so here’s my point in a few words. Nothing in marketing is worth doing “at any cost.” The next time someone tries to convince you that buying an ad, launching a new website, attending an event, or joining a networking group is an absolute must… determine first what the true cost of that choice will be.
Calculate the cost
Estimate the number of hours it will take to employ the approach you’re considering. Multiply the estimated hours by your requirement for earnings per hour, as calculated above. Add that total to the amount of hard money you’ll need to spend. That will give you the true cost of marketing.
Now, how much will this new marketing approach need to produce in sales in order to be worth your while? There’s no one formula that will work for every type of business, but here’s an example.
You’re considering joining a lead exchange group that meets weekly. The quarterly membership fee is $150, you’ll need to drive 10 miles each way to get there and pay for parking, and each meeting you attend will take 2 1/2 hours of your time. A rough estimate of the cost per quarter might be $1700 ($150 plus $185 for mileage/parking plus $1365 for your time, valued at $42 per hour from the example above).
If a typical client project for you totals $1500, and you land one project per quarter as a result of this group, you’ll be losing money. That’s a sobering thought. Before doing the math, you might have believed that four new clients per year would make attending this group worthwhile.
What if you land two projects per quarter at $1500 each? First, notice that each of these sales has a marketing cost of $850 ($1700 divided by 2). If each $1500 project would entail $100 in direct costs, you’ll net $550 per project ($1500 minus $950). If each project takes 18 hours of your time to accomplish, your net earnings will be $31 per hour. You’ll never be able to make your income goal of $80K.
In this example, you’d have to land three new $1500 projects each quarter — one new client per month — for your investment in this group to become worthwhile. Then your marketing cost per client would be only $567, you’d net $833 per project, and earn $46 per hour, $4 more than the required hourly earnings to meet your goal.
If you believe that participating in this group will deliver one new $1500 project per month, you’ve just identified a worthwhile marketing approach. But if you believe that 12 clients per year is too much to expect, or that you’d actually need to spend even more time and money on having coffee and lunch with other group members to see that kind of payoff, you’d better forget about the leads group and consider a different idea.
Whew! That was a lot of calculating. If math isn’t your strong point, you might be tempted to skip this whole exercise and just take a gamble. But really, wouldn’t you rather spend 15 minutes running some numbers than spend six months trying a new marketing approach, and then find out it’s costing you more than it will ever bring in?
About the Author: C.J. Hayden, MCC, CPCC is the author of Get Clients Now! (AMACOM, 2007), Get Hired Now! (Bay Tree, 2005) and The One-Person Marketing Plan Workbook, and a contributing author to Guerrilla Marketing on the Front Lines. C.J. is a business coach, consultant, and speaker who teaches people to make a better living doing what they love. Her company, Wings for Business, specializes in serving entrepreneurs, self-employed professionals, and people in marketing and sales.