New owners often dread the thought of having to pay for expensive advertising. Risking hard-earned money to get customers can be a challenging concept to accept.
Since new companies have precious little investment money and lots of bills to pay, owners show understandable caution in giving it away. Unfortunately this caution to invest is often the reason startups struggle. From the beginning, a startup needs a steady flow of new customers.Without it a business is going to fail.
It is the responsibility of the owner to take this risk.
Source-based marketing deals with this challenge straight on by testing customer sources to find the most profitable options quickly and with minimal risk. New companies cannot simply rely on repeat and referral customers. New customers must instead come from marketing and advertising.
New companies usually need to test about 30 sources in order to find the 10 to 20 most profitable ones. If this is done well, acquiring new customers should never again be a problem.
In the first two articles on source-based marketing, I discussed that marketing must focus on the sources of customers rather than individual consumers. The number of sources necessary for a start-up business is often overlooked; there must be 10 to 20 sources to bring in the vital number of customers. The next step is to test how well those sources perform.
Testing new sources
John Wanamaker, the father of modern advertising, put it well: “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
The solution to this problem is to test and measure each of the potential sources in order to find which are profitable and which are not. Every company must do their own testing to find what will work for them.
Some sources will result in expensive failures, and this must be expected as part of starting a company. Others will produce mediocre results, which might be useful when initially getting experience. Finally, some will be profitable. Testing determines which category each source falls into.
Test objective: Testing is used to get a fair evaluation of how many jobs a source can produce and how much each job will cost.
Size of test: Determine the area of distribution, size of ad and the number of consumers reached in order to give the source a fair test. If it passes the test, expand your use of that source.
Length of test: How much consumer exposure will be adequate to get reliable results? Print advertising usually requires longer exposure time to get a good measurement. The results of print advertising (newspaper, coupon mailers and magazine ads) generally improve with multiple consumer exposures. Digital marketing (AdWords, Yelp and Home Advisor) can normally be tested for a shorter period since consumers need only see these ads once before making their purchasing decision.
Cost of test: For budgeting, it is important to know the total cost of the test. Because you are working with a small sample, tests will normally be more expensive than using the source at a maximized level. The profitability of tested sources should be determined by factoring in the lower cost.
Ad design/discount offered: It can sometimes be worthwhile to rerun the test and see if the results change after modifying the design of the ad or changing the incentive offer.
Some advertising requires a contract. In these cases, look to see what the shortest contract period is and how much you would pay for early termination. A source that is performing poorly should be stopped as soon as you discover it.
An example of application
I will use door hangers as an example.
Size of test: In this example, 2,500 door hangers are distributed, assuming 100 door hangers can be distributed per hour (25 hours of labor). They are delivered to homes in slightly above average income neighborhoods.
Length of test: Test results will be evaluated 21 days following the distribution.
Cost of the test: The cost for the door hangers is $277 with distribution labor at $375 (at $15/hour) for a total cost of $652.
Ad design/discount offered: The door hangers are two-sided and professionally designed with a three-room discount offer.
Test result: Eleven jobs are produced, bringing in $1,320 in revenue.
Analysis of results: Increasing the distribution area would lower the cost per door hanger from $0.11 to $0.05. The door hanger cost would drop to $125, thus lowering the total cost to $500. This means it costs $500 to bring in $1,320 in revenue (a 2.6 to 1 return on investment). This return would be considered profitable for most new companies.
More profitable sources will be discovered as more sources are tested.
In next month’s final part of this series, I will discuss how to determine what return on investment is profitable.