…if you can prove to me that I would make a return on my money.
That basic premise is how so many people get rich through investing. It’s a principle that financial moguls like Mr. Buffett have relied on to attain such great success. In fact, he has one of my favorite quotes of all time: “Risk comes from not knowing what you are doing.”
It’s true! When you have an understanding of the typical ROI associated with an investment, it’s not gambling. It’s making a wise business move.
Which leads me to a bone I’ve got to pick with some business owners out there…
Where did this whole 7% marketing spend thing come from? And why is it treated like gospel to so many businesspeople?
Within the correct framework, marketing should be thought of as an investment, not a box to check or a hoop to jump through, or a percentage to stay under.
And look, I’m all for being sensible when it comes to costs. I’m no trust fund baby, and I 100% value the importance of being frugal and wise with my money.
I also understand the apprehension that comes with marketing. It’s ingrained in so many minds that marketing is a risky investment – that you, in the words of Forrest, “Never know what you’re gonna get.”
But here’s the thing about marketing on the internet these days…
In most cases, you do know what you’re going to get.
Boxes of chocolate, by the numbers
I’ll get back to your million dollars in a minute, but first, we need talk about some other numbers.
I’ve discussed my appreciation for data in the past. It’s a big topic that is making its way into all kinds of verticals and industries.
But before you go worrying about the data of your website, or general user data, you should first focus on the #1 piece of data that matters above all else: ROI.
Return on investment, after all, is why you do marketing in the first place, and it’s the guiding principle for any savvy business leader’s decisions.
And it’s true: traditionally, it’s been difficult to calculate ROI for marketing spend. You just don’t know how many people bought your product because of this TV commercial or that print ad.
But with the internet, it’s a totally different ballgame.
Not only can you know exactly how many people visit your site on a given day, you can know exactly how many of those visitors converted into paying customers. On top, you can know which sources your customers are coming from, whether it be organic search results in Google, paid advertising, email marketing, or any other online acquisition source.
When you calculate that together with your costs, understanding exactly how much you’re making from specific marketing tactics is quite feasible.
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A really simple ROI equation
Let me give you an example.
Say you’re a home services company paying an SEO professional $2,000 a month for local SEO services.
On top of that, you have the money you put – or are putting – into your website, including ongoing costs, such as hosting. All told, you’re putting about $2,500 per month into your internet marketing efforts, or a yearly spend of $30,000.
Now, say you start increasing your online visibility by ranking well on Google and begin to generate more customers. Maybe it takes a few months for things to take off, but the leads start coming in. Now, say you make $1,000 in profit per job. If you get 30 jobs from the internet that year – generating $30,000 in profit – you’ve made your money back.
When we factor in CLV (see below) – not only did you make your money back, you’ve likely made 200-300% ROI from these 30 jobs.
That would mean an average of 0.58 new customers per week to get a 100% ROI.
60 new jobs (1.15 per week) from your SEO campaign would mean that you got an immediate 200% ROI, doubling your investment in revenue.
Ultimately, ROI is simply your profit divided by your costs multiplied by 100 and made into a percentage (100% being when you break even).
(Profit / Marketing Costs) • 100 = ROI%
Now obviously I’m picking nice, even numbers to make the example simple. But the point is, when you combine these simple formulas with the power of analytics and data, you can go from shoulder shrugging to firm decisions – decisions that pay off in the end and help you actually grow as a business.
How much are your customers worth over time?
I frequently have people ask me if they’ll make money with SEO.
Well, for a $24,000/year spend and a profit of $1,000 per customer transaction, that’s only 24 customers needed per year. Or two per month.
If we use conservative estimates of 1% conversion rates from traffic to customers, that’s 20 calls/emails per month or 200 qualified visitors per month. For most industries, that’s achievable with 2-3 keywords. A good SEO will rank you for dozens to hundreds of keywords.
Now, we obviously don’t want to break even, we want to make money!
Well, there’s one specific, highly important aspect of estimating your ROI that we haven’t talked about. Customer Lifetime Value (CLV). This metric indicates how much you can expect a customer to make you over their lifetime. After all, once someone buys from you once, they’re more likely to buy from you again.
Let’s look at HVAC customers. Their CLV (without adjusting for inflation) is over $21,000. Meaning that in reality, to cover a year of SEO spends at $2,000/month, an HVAC company only needs to bring in 2 customers a year.
That’s going to be highly feasible for any good SEO, even if you’re in a competitive market.
Why don’t business owners focus on CLV?
We’re all impatient. We’re focused on short-term gains rather than long-term results.
Even though we know that once Joe becomes a patient at ABC Dentist he’s likely to come back for two cleanings a year and probably get at least one cavity filled a year, we value that customer at the initial visit.
Now, of course, it is true that some customers will only buy from you once.
But we’re not talking about exceptions or individual examples, we’re talking about the average.
And if you have a good sense of the average CLV of a customer, then the question of how much you should spend changes a great deal.
You might not, in fact, make your money back on a customer’s first purchase with you; but if you trust the numbers, you know that a certain percentage of them are going to use you again the future.
While getting a solid figure for CLV can be tough, if you’re just tackling the metric for the first time, you can get some baseline projections and approximates built out based on past customer behavior, and continue to refine over time. And while CLV can be a complicated metric for e-commerce stores, it’s actually a lot simpler for local service providers.
To keep it simple, the equation is the average value of an order multiplied by the number of average orders a customer will make in 1 year – and then multiply that number by the average lifespan of your business.
Back to that 7% rule…
Now, if the data shows me that I can make a nice ROI from certain marketing tactics, and I understand the ins-and-outs of the value of leads and returning customers, where does the rule of being careful with that come from?
Yes, there are limits to how much you can expect from your spend, and more money does not always equal a proportionately equal ROI (that’s an equation you could measure in-and-of-itself). And things do change in online marketing.
At the same time, there’s simply too much money, technology, and brainpower behind the SEO and internet marketing industry for it not to be backed by a relatively tried-and-true methodology.
Add to that the fact that most customers will be much more valuable over time than their initial purchase suggests, and it becomes a no-brainer.
So yes, things change. But not that quickly, and not if you’re working with professionals who know what they’re doing.
Do your people know what they’re doing?
It’s a big problem, particularly in the SEO industry where a few bad actors have made many see the whole strategy as “snake oil.”
SEO is a marketing method based on reverse engineering sophisticated algorithms that are constantly changing, and there are a lot of lazy marketers out there who act like it’s impossible to know what works.
But for those who truly understand the principles of SEO – or any internet marketing strategy – it’s not all that unpredictable. We know what Google’s intentions are. We know a lot about how they work, how they’re changing, and what’s likely to come next. We know how to plan that into our clients’ strategies, thereby eliminating a lot of risks.
Sure, your ROI might drop from one month to the next. But clearly, what matters is the long-term.
If you’re working with the right people, they know that. And if you’re not working with the right people, you should know it, and it’s time to find a professional that will take growing your business seriously.
Pro tip: If your marketing agency isn’t talking about, and focused on, ROI – Run. Being #1 in Google doesn’t mean anything. Being #1 is a medium to gaining traffic that then needs to convert.
Plan for the long-term
I see too many business owners struck by “shiny object” syndrome.
It’s hard to blame them, every day there are hundreds of new articles about the “next new thing” that will make them a millionaire.
They’re enticed by a marketer or agency’s promises, and before you know it has dropped all of this money with little results to show.
So they cancel the service or fire the agency and move on… only to fall into another set of lofty promises (often ones that include that they are “not like the other guys”), and the cycle continues.
You’ve got to do your due diligence up front. Period.
You wouldn’t buy a house without seeing the inside first.
As I previously mentioned, talk with potential service providers about things like ROI. Ask the hard questions, and don’t be afraid to start off a little bit slow to make sure things feel right.
But you’ve also got to be clear about your – and their – expectations. For my kind of work, mainly SEO, it takes 3-6 months to start seeing significant results. The results are terrific, and an upfront investment can save you a ton of money on paid advertising while delivering better results.
But when a client expects to see results in one month for a few hundred dollars, I know we have a problem with expectations. It’s not a realistic goal – for neither the spend nor the time frame – and it’s not going to turn out well for anyone.
Find someone you can trust. Find someone that will tell you the truth. Even if it doesn’t involve taking your money.
The other day I was talking to a friend who told me he literally had to refuse his services to a potential customer who really wanted to hire him. He knew they wouldn’t be a good fit for what he was offering (their market was too big), and he told them no.
While I admire him and think we need more like him, it would have been pretty hard to feel bad for the lead if he had let them hire him. When you’re not doing your due diligence when hiring, I can promise you this: You will be scammed, or fall into a trap, or choose the wrong type of service upfront.
But for too many business owners, it’s about checking off the box, simply saying that they’re trying internet marketing.
Three words for you: waste of money.
Find your golden nugget
One more point I’d like to drive home.
With the above example of the home services company, I don’t want to give the impression of ease and simplicity in all ways. I picked round numbers to make the calculations simple, and I left out the hypothetical background to focus on the numbers.
But the example, in my mind, is based on the premise that the business found a method that worked for them – SEO. They tried it, they had some success, they measured it, and then they threw the majority of their marketing dollars behind it.
Why? Because it was a no-brainer. They knew they were making money with it, so they doubled down to make even more money. If $2,000 a month is generating 30 leads a month, imagine what $5,000 a month could do? They could see their organic traffic consistently increasing, along with conversions. Instead of starting from scratch with a new digital marketing method, they can use the data they have on their SEO success to optimize their landing pages for conversions, further increasing their success.
But the reason they were able to see success is that they stuck around and invested enough to see results. They did their research, figured out a little bit about what made sense for their business, and then they found smart experts to help them.
In other words, they weren’t just gambling on the market, throwing things against the wall, or otherwise taking guesses. They treated their marketing as an investment that had the potential to help them scale their business like nothing else could, and that set them up for success.
Back to those $1 Million…
Right! The reason you’re here!
Here’s the punchline:
If you could fine-tune your internet marketing efforts, and your ROI is anywhere over 100%, even just 1% higher, I would be happy to give you $1 million to invest in that.
That’s how much I believe in the powers of data in the online world, and in a good marketer’s ability to use that data to make a near-guaranteed ROI.
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If that were the case, and you rightly projected a 101% ROI, I would almost be guaranteed a $10,000 return, and I would be crazy not to jump at that. It’s like Vegas… except you know that you’re going to win. In other words, it’s not like Vegas at all.
Now, if you knew that every dollar you spent on marketing would double, would you spend $10,000 because that’s “7%” or would you spend 20, 30, or even 40%?
If you knew you’d win the jackpot on your next slots spin, would you walk away because it would take your last quarter? Wouldn’t you run to the nearest ATM to withdraw every cent you had?
Internet marketing has become a science. And that’s how you need to treat it, because that is what data has made it.
Here’s my mantra: Choose a marketing method, test the waters, tweak, observe, tweak, generate consistent results, double down. You don’t dominate your market by jumping from tactic to tactic. Figure out how to kickass at PPC, SEO, whatever it is. Double down and then look at other methods to tackle. That’s how you dominate the market.
[bctt tweet=”Choose a marketing method, test, tweak, observe, tweak, generate consistent results, double down”]Screw 7%.