In this blog we discuss the importance of developing a marketing strategy and how to measure its impact on your profit.
Marketing strategic planning is part of your overall business strategy; it sets the way you drive revenue in your business. A marketing plan focuses on customer acquisition and retention, and it includes online and offline marketing activities such as market research, selling, advertising, sales promotion, etc.
Other components of your business strategy are financial, production, human resources and R&D. These are also part of a small business, in a smaller scale than larger companies if you like, but considering all these factors and having policies and procedures in place will ensure that your business runs smoothly, doesn’t require you to be repeating yourself and wasting your time and if something goes wrong you know exactly what to fix.
Impact on Profit
As a management accountant I’ve seen the impact of marketing, HR, production strategies in the financials. The relationship with the bottom line may not be obvious.
Like in example, who would’ve thought that the lack of a proper HR policy will affect more than just the employees and management. It impacts your profit, actually affects both profit and cashflow, in terms of not being able to collect long overdue accounts receivables, loss of money not only in theft but in employee productivity, not to mention employee rotation, interview and training time and employment fees, such as recruitment or advertising.
The above also happens when you hire a freelancer. It can be a hit-and-miss sometimes, the process of contracting services is easier, but you need to measure results, for sure.
That is another advantage of keeping your bookkeeping up to date, it will provide you with timely information to drive business decisions. You can measure if your strategy is working, what needs to be implemented and where your business is going.
Aligning your marketing strategic plan with your financials will help you measure the effectiveness of your current strategy and make timely adjustments if needed.
How much should I spend on marketing?
I remember my times before doing the Business Administration Master’s degree, I was too focused on the numbers, saving money, closing deals, maximising profits. But I didn’t take consideration of the other parts of the business, one of them marketing.
Marketing was too abstract for me to understand.
Back then, many years ago, I was working as a treasurer at a large retail chain. I was asked to plan for a big expenditure on banners, it crossed me (I treat my clients and employers’ businesses and money like my own, I take care of it). Spending that much on marketing didn’t make sense to me: why the business is spending that much money on banners that will only be a few weeks displayed at the store? Why do you need to spend that much money?
The expense was approved by the CEO, but my mistake was not taking into consideration that those banners will add to the feel of the store, drive foot traffic and making the customers comfortable as happy resulting in more time and money spent at the store. There’s more to it, but I now get it, I have a broader view and a wholistic approach to business.
Marketing is an investment not a cost
It is not uncommon managers or business owners to suggest cuts or not allocate enough money to the marketing budget in a way to increase profit, especially when time gets tough, like in our current COVID-19 economic environment. The main reason is that money spent in marketing activities such as advertising and promotions is seen as a cost not as an investment. The only caveat is that you need to hone your marketing skills or hire a good marketer to really make your dollar count.
Marketing was a big blur for me for so long until last year when I invested in Business Jam by Jessica Osborn, and it finally made sense, all these years, all clicked. I started to see how important is to have a marketing plan but not any plan, a good one. Marketing was the missing piece of my strategy puzzle. It gave me a clear path and direction and help me stop procrastinating and start doing and by default make money in my business.
Doors to Business Jam are open right now but only until 5th March. So be quick to get a spot, don’t let this opportunity go.
The question is how much you should be spending in marketing?
The answers depend on many factors. Many publications agree on that if you are a new business you are looking at investing 20% of your revenue for quick growth, if you are focusing in growth a 12% but if you are looking to maintain your current level probably you need to invest less than 10% of your revenue. The real question is in which marketing activities you should be investing time and money and the proportion? We are not talking just advertising in that 20% but a series of activities. This article can help you identify trends for 2021 for online marketing activities https://www.webstrategiesinc.com/blog/how-much-budget-for-online-marketing
My advice is to decide on your marketing strategy and measure its effectiveness. And if you are forced to cut your marketing budget then start for the one activity that is not giving you the most results.
How to measure marketing effectiveness?
I can get lost in measurements and metrics, there are plenty, customer satisfaction, brand awareness, etc, but I’m going to choose two that are linked to your financials and are very helpful and easy to calculate: Net Marketing Contribution (NMC) and Marketing Return on Investment
What is the Net Marketing Contribution metric?
The net marketing contribution metric enables you to measure the impact of your marketing strategy on your profit. It tells you if marketing strategy is generating results and making you money.
NMC = net sales – the cost of goods sold – marketing expenses
How to increase my NMC?
Review your marketing strategy to assess what is working and what is not, where are you spending the most money and what is driving the sales.
Remember: you have other expenses, fixed costs, that don’t form part of the formula but are necessary to keep your business running. The net marketing contribution only measures the effectiveness of your marketing not the profitability of your business.
Marketing Return on Investment (ROI)
This ratio allows you to evaluate the efficiency of your marketing. Have you heard the expression spend $1 to make $2? This how you measure it.
The higher the ratio means a more productive marketing strategy.
Marketing ROI formula:
Marketing ROI % = Net Marketing Contribution ÷ Marketing Expenses x 100
|Profit & Loss Month (partial)|
|(A) Sales $35,000|
|(B) Cost of Good Sold $10,000|
|(A)-(B)= (C) Gross Profit $25,000|
|(D) Marketing Expenses $7,000|
|NMC = (C)-(D) = $25,000 – $ 7,000 = $18,000*|
|MROI = NMC ÷ (D) x 100 = 257%|
The NMC of Company XYZ is $18,000, which should be enough to cover the other expenses in the business and make a profit. If it isn’t, then they have the option to review the cost or increase the NMC. The MROI is 257%, for every $1 spent in marketing the business makes $2.57.
You can also use this analysis to measure one campaign or one specific aspect of your marketing expenditure such as paying for advertising or measure sales increased as a result of an additional marketing expense and if it was worth it.
It is important that your marketing keeps on supporting you in driving sale, and you have a bookkeeping system that helps you track your numbers properly. For effective marketing strategies, remember to check Business Jam.
We can help you align your marketing strategy with your financials and implement a good accounting system that helps you have visibility on your income and expenses, so you have up to date information with clear accounts making easier for you to calculate these and any other metrics that are useful for your business and help you reach your profit goals.