How much should you spend on advertising (marketing)?

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What should you measure with your marketing?

Yes, this is a loaded question, especially since our business earns about 95 per cent of its revenue from advertising sales. And the answer can be relatively easy, or relatively difficult, depending on the nature of your business, your average sales unit revenue, your sales cycle, and your lead conversion rate.

The simplest answer occurs for contractors selling relatively high volume services to a diversity of clients. These services most frequently work in the residential sector, perhaps repairing roofs, or sealing driveways. You can assess your annual sales, your solid lead conversion rate (that is, leads that are worth considering and effort, converted to actual orders) and then allocate something like three to five per cent of your projected or goal revenue to advertising/marketing. (Note estimating costs, commissions and business development expenses, if directly related to the work of sales reps, should come out a different budget pot.)

This means, if you have a million dollar business, your advertising budget, on the low-end, should be about $30,000. If your unit sale is $10,000, then you would like to achieve 100 sales, and if your leads/sales ratio is a four times multiplier, you would expect your advertising to generate 400 high quality leads a year. Your maximum cost per lead from your advertising then should be no more than $75 per lead.

You can then track your advertising, and if the cost per lead from any media or service turns out to less than the $75 number, it is profitable — and anything you can do to reduce the cost per lead just adds to the bottom line. You also can use this number as a guideline to manage your expenses, perhaps stepping up your advertising when your lead volume is slowing (but not above the safe lead/revenue ratio), and slowing it down when the volume of leads exceeds your capacity to service them effectively.

These concepts work quite well for simple residential sales, but alas are less helpful if you are in the ICI market or sell relatively complicated or expensive projects.

The reason, in part, relates to the relative decision-making complexity. I don’t think any organization will order a $5 million (or for that matter, a $50 million) building primarily because of your advertising. The lead value will be diffused among a diversity of (often hidden) decision-making individuals and rules.

As well, you can’t extrapolate your data effectively. Is the single $7.5 million order resulting from an inbound advertising/marketing inquiry a fluke, or because you had a brilliant strategy?

In this environment, assume for this evaluation that you allocate a lower budget for marketing/advertising at 2 per cent of sales, and you have an annual sales volume of $50 million.  You also know you have generally discovered your business arises from public bid/tender opportunities and repeat/referral sales.  In theory, you have $1 million to spend on advertising/marketing, but what should you do with that money?

Here, the decisions indeed are more complicated. A few years ago, I surveyed several successful larger AEC practices to find answers. One of the most interesting insights came from a successful architect, who determined by measuring time tracking tools that the most critical indication of success in winning work was the amount of time the practices’ principals/partners spent on the file pre-bid. In other words, if the owners/leaders wanted the project enough to invest their time in it, the practice got the work.

This discovery influenced its go/no go practices. When the marketing committee decided whether to spend time and money in answering an RFP, the answer would be “no go” if there wasn’t significant previous principal buy-in.

Although we can argue that the time for principals’ involvement should be budgeted in a separate pot, business development rather than marketing/advertising — if we measure the principals’ time, you can see how you can easily “spend” several hundred thousand dollars a year — without spending a cent on advertising/marketing.

Notably, as well, lead generation/source services have different relative value/effectiveness in the small-scale residential and higher-ticket ICI markets. Reputable leads services such as McGraw-Hill (Merx in Canada) and DataBid.com will generally require a fraction of your two per cent marketing allocation and provide worthwhile data and decision-making insights to make the investment entirely rational.

Residential lead generation services are more controversial. You can certainly more readily track the conversion rates, and if they work within your budget, they may be effective. However, if you have a solid well/designed website and an effective system to induce referral and repeat business, you may find your cost per lead is much lower, and you’ll be in control of your own destiny.

I’m confident you can achieve the highest and best results from your two to three per cent marketing and advertising allocation with these methodologies.

  1. Build a solid lead generating website. If you are well-organized you can do this for less than $1,000 a year but you’ll need some experience and understanding of WordPress, self-hosting and other techniques, as well as offshore labour. But you don’t need to get that cheap. Even if you need to spend $5,000 to $10,000, you will still have marketing money available.
  2. Establish a past-client communication/referral generating program. Again, the costs here can vary, but they won’t be extremely high and your return-on-investment will be really effective.
  3. Allocate funds and time for relevant associations. This money should be spent on paying the dues for key employees and if you are measuring time input, their non-billable hours. In our business, (allowing for the fact we’ve covered one and two inexpensively), it is our biggest marketing budget item. However, we can assess our ROI–and the highest and best results occur when our employees find their way on to association directorships or leadership positions.
  4. Finally, spend money with relevant community/trade media, geared of course to your intended audience. Heck, that’s us! I don’t expect you to advertise in any of our publications or websites unless they serve your relevant markets, but if they do, the overall service package can make your investment entirely worth the money. This is because of our underlying belief that our clients should get value for their money. The value can be defined by factors other than immediate lead generation from the advertising expense; it may be the publicity/media attention, or guidance on how to apply other marketing strategies, but it is still there.

So, yes, consider spending two to three per cent of your projected gross revenues on advertising and marketing. Don’t do this blindly. In the residential environment, you hopefully will quickly be able to develop a cost per lead and reward-on-investment strategy. In the ICI world, you’ll need more nuanced measuring tools and methodologies, but I believe the investment will still be truly worthwhile.

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