Small Business Marketing Answers: Is It Ever Okay to Lose Money on Your Marketing?
I’m in the middle of a fantastic dialogue with a client. We’re working on an online referral generation strategy for his financial counseling business and are in the process of playing with the numbers to determine what kind of referral incentive would be appropriate.
In the course of our emails back and forth, he sent me the following:
Katie,
We make $150 profit on the first month’s sale. Therefore, we would have to close 1 out of 15 people if we paid a $10 referral fee just to break even. What happens if we end up just breaking even–or worse, paying out more in referral fees than we earn?
Here was my response:
Is it necessarily bad to spend the entire first sale’s profit on acquisition?
The only way to really know is to test.
I don’t want us to close our minds to any alternative that may be effective and profitable. I’m completely comfortable–thrilled!–if we discover the most profitable approach is less “expensive.” I think there’s a good chance it might be. But…I’d still say we should test other approaches against it, just to make sure.
To play devil’s advocate, let’s say that using the pay per lead approach, we end up spending $150 to acquire a new customer. But what if we can acquire two, three, or five times the customers? Would that be worth it? Sometimes spending more on the front-end more than pays for itself on the back-end.
Now, if we’re worried that we don’t have the capital to test this particular strategy yet, that’s okay. We can put it on the back burner until we’re generating more revenue, and then re-invest that revenue into testing other options and refining our strategy.
Did you catch the big secret? “Sometimes spending more on the front-end more than pays for itself on the back-end.”
In the early start-up phases of a new company or project, you may not have that luxury because of your cash-flow needs. But many of the world’s most profitable companies operate at break-even–or even BELOW break-even–on the first sale, knowing they’ll make it up and then some on the back end. The secret to success in business isn’t to get a single sale. It’s to get as many customers (read: people who have actually spent money with you) on your list as possible, so you can go back to them over and over again.
I call it Lifetime Marketing. Follow the link for another post I made a few weeks back on this powerful principle.
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