Over the years, I have seen many start up companies investing large amount of money in their marketing strategy without knowing how exactly it is helping them in selling their products/services. If you are one of those Entrepreneur, you might want to continue reading. In this blog, I am going to provide you with one simple and easy method to calculate your marketing ROI (return on investment), and how to make your marketing dollars work for you.

For many small businesses marketing ROI and customer acquisition costs are mystery figures, yet they are the key ingredients to making decisions concerning marketing expenditures. Questions such as, “What should I give away as a free bonus?” or “How much should I spend on ads for the last quarter?” are answered based on the understanding of the lifetime value of a customer.  So, lets just start with a simple example to calculate new customer acquisition costs.

Let us assume that your total marketing costs for the previous year was $100,000. Now, count how many new customers you did business with last year. Let’s assume that you did business with 5,000 new customers. You can now divide your marketing costs by the number of new customers to determine your cost per customer. In our example, it would be $100,000/5,000 = $20.00. Of course, this is not entirely accurate, since you are not counting the marketing impact on your existing customers, but it’s a pretty good guideline for a start.

Once you do your initial calculation, you should now start to collect some important information from your customers at the time of the sales. For example, you should be tracking how your customers came to you and what motivated them to buy from you. One easiest idea you can use is to have them (customers) fill out a survey for a lucky draw to win a small gift card. Information collected from this survey will provide you some good insight on the marketing medium that works for your business.

Let’s assume that your effective marketing medium is Internet, and let’s assume that your 60% of the new customers come through your website.  It might be a good idea for you to invest chunk of marketing expense to online marketing. Let’s assume, your business is a small business and most of your customers come through word-of-mouth advertising, you can then provide some incentives to your existing customers for a referral. In our example, you can provide your existing customer a rebate of anywhere between $10 – $20 for referring a new customer. After all, your new customer acquisition cost is $20 per new customer.  This approach will not only create a new repo with your existing customers, but it will help you in increasing your business through these spokespersons.

I hope, my tips will help in creating an effective marketing plan for your small business. Before spending your money in bunch of advertisements, please calculate the ROI of your marketing dollars first, and then make an educated decision on where you want to spend that money. Please share your comments here, if you agree/disagree with my point of view.

Thanks – Bhavin Gandhi