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“How long will it take to get a return on my investment?” I am often asked this question and I believe that it deserves an answer. After all, it’s a perfectly reasonable question for a business owner to ask of their marketing company. Unfortunately, the problem is that the answer is a thorny one. Return on investment is not a “one-size- fits-all,” and it varies from company to company. Let us take a look at the two very different businesses:

Business 1 is a gambling website already making money. The owner decides that he wants to advertise on Google Adwords to extend his company’s reach and become widely known. He has heard that Google changed the rules recently, allowing gambling websites to advertise with Google Adwords, and he is excited at the idea of adding a well-established marketing avenue to his existing marketing plan.

Business 2 is in the idea phase. The owner wants to develop an app to enable an iPhone to function as a computer mouse. Since everyone and their aunt advises them to start marketing from day 1, the owner approaches us to help their business succeed as soon as it launches.

Now we look at three of the key factors that influence ROI

The first factor is product-solution- fit. Does your product solve a problem? With the gambling
business, the answer is yes. The business is making money, which is the proof. With the web-app business, the answer has yet to be discovered and, ultimately, will be answered after extensive market research.

The second factor is product-market- fit. Will people pay money for the solution? Again, with the gambling business, the answer is yes. People are already paying money; the owner just wants more customers. With the second business, the owner has not established this. A quick look at the app store shows that there are already people giving away a free iPhone mouse app. This creates a challenge for the business.

The third factor? The two business owners need to establish scale. Can they gain a sufficient number of customers in order to keep the business afloat? Business 1, already done. He has calculated his lifetime customer-value and knows his target cost-per-acquisition. Bonus? Google clicks for gambling are reasonably cheap, around R10 a click. The gambling business owner calculated that a customer is worth R3000 – R4000 per year, so the maths is pretty easy from there. He could probably spend R1000 per customer and see a return. With the app business, the price of an app is R3 – R4. The margin on that is tiny and he still has to give a percentage of what the app makes right back to the app store. Obtaining the scale portion of this is a challenge. In short, the second business owner has no validation whatsoever that anyone will buy his product, or whether he can gain them in sufficient scale.

And even if he could, the odds are stacked against him because he will have to acquire these customers for a few cents in order to see a return – a most unlikely scenario. A good marketing company should be able to tell the difference between business 1 and business 2 and everything in between. If iteration and testing needs to happen, there will be optimisation. The key thing that you can control in addition to restraining the variables is the speed with which you can go through the optimisation process. It is best in the long run to work with a marketing company that builds and tests quickly so that you can optimise your ROI in a shorter amount of time. Give me a shout in the comments section or fill in the form on the
Connect page if you need any marketing assistance.

How much should I allocate to my marketing budget? This question comes to me in many forms. It could be, “How much should I spend on marketing,” or, “How much should I spend on advertising?” The answer I always give is, “Do you have a working customer factory?”

A Working Customer Factory?

Yes, a working customer factory. If you have never heard that phrase before, you should read Ash Maurya’s book, “Scaling Lean.” ‘Customer factory’ describes the effects of having a working marketing funnel. If you have a factory where traffic coming in on the one side equals money going out on the other side, then you should scale up your marketing budget as fast, and by as much, as you can with respect to your cash flow. For example, if you have a thirty-day window from the time you have to spend on advertising to the time that you get your money back from real customers, then allowing for that delay, you should spend as much as you can on marketing because you are guaranteed a return on investment.

Unfortunately, most people do not have a working customer factory, which is often why they come to us for help. Advertising on Facebook or Adwords does not guarantee ROI. The only guarantee is that you can reach the people on those platforms with a given message.

Building A Customer Factory Is A Whole Different Challenge

You need to understand who your customer is and what their problem is, how you are going to solve that problem to generate income, and how you are going to position your offer so that your customers take action and purchase the product or solution from you at a sufficient margin to justify the cost of the acquisition. While you are building a customer factory, ROI is not guaranteed. You should go for ROI on a very small marketing budget because the real cost at this point is time and waste. Keep in mind that spending more money while you are building your customer factory does not speed up the building process. In fact, increasing the budget often means that you are more active and, if you are not clear on your customer-solution-fit, you can slow down the process instead of speeding it up, creating chaos when you should be creating order. When trying to build a complex machine in a factory, adding more people to the project will not necessarily speed up the process because the whole system needs to work as a seamless unit. If the people working on the one part are not in perfect synchronisation with the people working on the other sections, your result will be a machine that will not even start. We often see customers who have engaged a marketing agency, and when they cannot gain ROI month after month, they increase their budget. However, this still won’t work and so they say, “Adwords don’t work,” or “Facebook doesn’t work.” In reality, deep within the mixture of keywords, ads, landing pages, calls to action, and conversion tracking, nobody on that project could actually say with conviction what it takes to buy a customer. The actual problem was most likely to have been that nobody clearly understood the problem faced by the customer or how to position the product or service so that the customer responded.

The beauty of digital marketing is that you can have those answers, and all the necessary tools that will allow you to receive the data, and create structured experiments faster and more cost effectively than ever before. However, the discipline to be able to do that is difficult to find.

In conclusion, if you haven’t successfully been able to create a working customer factory, you should not increase your ads budget. If you find someone who knows how to do this, and if you are willing to spend the smallest amount of money possible, and do so until you have worked out how to deliberately buy a customer at a profit, only then do you increase your marketing budget.

If you would like us to help you with this, click here to book a brainstorming session or a lean canvas session with us via our Connect Page, and we will unpack the leverage points within your business and look into building you your own customer factory.