Calculating your advertising budget

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Michael Stone publishes an incredibly useful twice-monthly e-letter, linked with his Markupandprofit.com site.

In his latest issue, he looks at various steps and measures residential contractors should consider in drawing up their annual business plans and projections.  He suggests a formula for determining the ideal advertising budget by assessing the cost per lead, your sales closing ratio (conversion of leads to orders) and the potential revenue from the leads generated.

Stone suggests that the you should be closing about 1 in 3.5 to 1 in 4.5 of your leads.  If you are closing more, you are probably under-pricing your services; if you are closing fewer, you have some serious issues with your sales process.

“Cost per lead” of course requires you to compare the amount you spend on advertising to the actual number of leads your advertising generates.  This requires you, obviously, to track your advertising results.  More importantly, you want to know what results are occurring from each media; in the ideal model, you will be able to track your leads from beginning to end — and then see your true revenue and cost per lead through the various channels you use.

Stone outlines other elements in his formula, but I’ll let you to subscribe to his newsletter rather than publish his copyrighted material in this blog (as I’m writing this entry on short notice, I don’t have time to ask permission!)

As well, note that Stone uses “advertising” in a wider sense than conventional paid print, radio, television, or direct mail marketing.  He would include your website and organized referral/relationship programs in this total, and I continue to believe the greatest and best marketing results come from the latter approach, rather than conventional public media advertising.

Now, this advice leads to one of the most challenging issues when you are setting a marketing system in place — getting started.  I’ll explore the challenges a little more tomorrow, but the big problem most people in this industry have in developing marketing strategies for the first time is to figure out the systems and disciplines they need to effectively set their priorities, track and measure results.

In a way, if you are a residential contractor or renovator, your marketing challenges are relatively simple.  You have often a relatively short-cycle marketing/business development and project completion cycle.  (I realize major renovations can take several months to complete, but consider the difference than if you are a contractor or supplier to a multi-million dollar institutional project.)

Non-residential marketers, conversely, are often caught in the trap that the discrete and easily measurable activity — responding to RFPs and tender opportunities — is often the least meaningful real part of the marketing process.  The question, in these situations, is whether you have the inside track through existing relationships; and these are often soft activities, over many years, which lead to the tip-off of impending projects/opportunities and word that you are the chosen contractor or professional service provider ahead of the public RFP announcement.  I’ve covered some aspects of this measuring challenge in a series of articles in the SMPS Marketer magazine.

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