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Measure your marketing ROI

October 22, 2014 -  By
Photo: ©istock.com/BrianAJackson

Photo: ©istock.com/BrianAJackson

The truth is many landscape contractors know little about marketing. Honestly, what do you know about marketing? Is yours even working? Do you know for sure? How do you know?

I’m sure some of you are muttering: “Half the money I spend on advertising is wasted. The trouble is I don’t know which half.” With modern analysis, that variance has shrunk dramatically, but only if you measure and analyze.

Marketing requires having fun, experimenting and measuring the results. The problem is most landscape contractors have little experience in any of these. The average contractor spends 0.9 percent of his revenue on advertising and promotion. With such little spent on marketing, how much could contractors possibly know about it?

Many contractors don’t know the difference between sales and marketing. Like many small business owners, they combine the fields into a mishmash, something my MBA colleague calls “smalketing.”

Well, not only are sales and marketing miles apart in the systematic processes required for them to be effective, but they need to be measured separately. Selling is about converting leads into customers, so your lead conversion rate is vital to measure. But marketing is about lead generation cost per qualified inquiry, so the effectiveness of each campaign is vital.

To that end, how can you make sure your marketing is effective? By testing and measuring it. It’s been said, “You can’t manage what you don’t measure.” And no statement is truer when it comes to marketing. The challenge is many forms of marketing don’t all work as stand-alone campaigns. They might require or benefit from some other forms of marketing to support them.

For example, my most successful marketing campaign was a direct mail letter sent to a cold list that cost me less than $400 to mail. It returned more than $75,000 in revenue (and counting). While the bulk of that revenue came from one client that never had heard of me, the rest came from clients who had heard about me from other marketing efforts, namely my articles, speaking and seminars in the industry. The fact that a client who I was unknown to hired me might have been luck and timing. But I spent a lot of time cultivating an expertise in the community, and the rest of the income came from other forms of marketing. It’s difficult to measure and decide which marketing worked, but it doesn’t mean you shouldn’t bother.

How to measure MROI

Whatever your preferred method of marketing—whether it’s email, direct mail, social media, pay-per-click advertising or direct selling—you have to try to measure the results you get from it to be successful. And you should have a simple benchmark number to evaluate a marketing campaign’s success or failure. That number for many companies is 3:1. But it will depend on your business.

Just like you’ve committed 911 to memory for emergencies, 611 for your cell phone provider and 411 for directory assistance, commit 311 to memory for guiding your marketing spend. You should require a marketing return-on-investment (MROI) of 3:1 on your marketing dollars spent. In other words, you need to have gross profit of $3 for every $1 spent on advertising. Why 3:1? Suppose you spend $1,000 or $10,000 on a marketing campaign and, like many service businesses, your gross margin (or labor, plant and material costs related to that work) is 45 percent. That leaves you $450 or $4,500 to cover your overhead, profit and marketing campaign costs. If your marketing costs are one-third (33 percent) of your gross profit dollars, this will leave 67 percent to cover overhead and profit, which we’ll allocate equally to overhead and profit. With this methodology, there’s enough left over to risk and reinvest in your next marketing experiment.

Your business model (i.e., one-time construction revenue vs. recurring maintenance) determines how you measure your MROI. One basic formula a construction company might use for the gross profit of a campaign is:

Gross profit – marketing investment/ marketing investment

Whereas a maintenance or recurring-revenue type business model might use the customer lifetime value (CLV), with CLV being a measure of the gross profit generated by a single customer or set of customers throughout their lifetime with your company:

Customer lifetime value – marketing investment/ marketing investment

Decide what to measure and focus on campaigns that deliver the greatest return on investment. Once these numbers are obtained, it’s nothing more than an algebraic equation you can create in your spreadsheet program to forecast how many leads you need to break even. Here’s one example of a formula you can use with the data you’ve gathered above:

(Ad investment / average gross profit per sale) / lead conversion rate = leads required

Now with numbers:
($2000 / $2000) / 20 percent = five leads

If the advertising medium for the aforementioned example can’t show you’ll have a reasonable expectation of receiving five leads on your $2,000 spend, then it’s probably not a good investment. The point is not to break even. It’s to establish a minimum MROI threshold and to keep experimenting until you find the best results.

Are you ready to make your marketing work for you? If so, here are your next steps:

-Establish an MROI threshold for your entire budget and individual campaigns.
-Set a marketing budget according to your MROI goal.
-Test and measure each campaign by tracking the source of the inquiries and leads.
-Have fun.
-Seek help if you are stuck.

Goldhill, founder of The Goldhill Group, provides strategic business, marketing and sales consulting to owners, managers and salespeople of growing companies in the green industry. Reach him at Jon@TheGoldhillGroup.com.

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