Evaluating an Inbound Agency? Don’t Lead with Price
As a business owner cash flow is king. The many decisions you make each day impact this, and can make or break your business so it’s important to know what your business can and can’t afford. This holds true when it comes to deciding on an inbound marketing budget, but how do you know what you can afford to spend?
Inbound marketing is a worthwhile investment but when it comes to paying for it, many businesses have a hard time parting with the cash and simply see dollar signs versus the real value they are receiving. True, it can seem expensive at first – unless you know exactly how to calculate what your business can afford to put towards inbound marketing.
This blog post explains how to calculate an inbound marketing budget that makes sense for your business and should provide you with a return-on-investment.
To determine how much your business can afford to invest in inbound marketing you must ask yourself these questions first:
1. COCA: Understanding your company’s Cost of Customer Acquisition (COCA) is important for a number of reasons. First, it tells you exactly how much it costs your company to obtain one new customer. Second, if the average lifetime value of one customer is less than your COCA, then your current marketing costs are too high. This information will help you make an informed decision as to how much you can spend to obtain one new customer.
To help our prospects determine their COCA we ask for the following information:
• Fully loaded annual salary of full-time employees involved in marketing team.
• Annual marketing spend (tradeshows, conferences, advertising, software, etc).
• Approximate new customers acquired annually by all channels (referrals, online, etc.)
Understanding a prospects COCA helps agencies like ours price our services based on value – if our prices are higher than your COCA and lifetime value of one of your customers we won’t be providing you value and it’s likely not best we work together.
Lesson 1: Leading with price as a deciding factor for which agency you work with ultimately overlooks the true value an agency can provide by keeping your inbound marketing costs low.
2. Average Lifetime Value (LTV): As mentioned above understanding how much revenue one client means to your company will also help determine your inbound marketing spend. This can be based on any frequency of purchase by your customer – one or multiple times – over the course of their life time as a customer and also include non-reoccurring customers (one-time purchases).
You will also want to include the gross margin of a customer in this calculation so you’re accounting for expenses after revenue. For example, if one customer means $9000.00 in revenue to your business and your gross margin is 30%, true revenue for your company is about $2700.00. This would likely be the maximum you could afford to spend on your inbound marketing per month and ultimately helps set a price point you can aim for.
Lesson 2: Use your customer LTV as a reference for inbound marketing budgeting.
When evaluating an inbound marketing agency to work with leading with price as your first deciding factor may shortchange your business in more ways than one. Not only does this prevent an agency from being able to provide effective services to your company it also puts the focus on cost instead of value.
Inbound marketing is both an investment in time and money but with patience and focus it will help you achieve your lead generation goals.