Neil Lewis explains why entrepreneurs often massively underestimate their marketing and sales costs, and reveals how to get better value.
You have a prototype. You?ve been through the proof of concept phase and you have customers who are willing to pay, or have already have paid, real money for your product or service.
What is more, your first customers are so happy they have provided you with referrals and testimonials.
Great, you have the beginnings of a business.
Okay, time to think about both marketing your products/ services and funding.
Why do these happen together?
Essentially, marketing costs a lot of money and that is why you may need funding.
In fact, marketing costs a huge amount of money.
You see, a key mistake that entrepreneurs make is underestimating the cost of making and delivering a sale, sometimes by a factor of 10.
If you underestimate marketing costs, then you will make one of these mistakes:
Not raise enough cash to meet the marketing budget
Find you have a great product, but your manufacturing or service delivery costs make it unprofitable
Fail to price your product effectively
Essentially, if your business idea passes the 'does this idea have legs?' stage; then you enter the 'proof of business concept' phase. You now have to demonstrate customer satisfaction AND a profit.
So, what will marketing cost?
Firstly, be careful of marketers. They are taught in marketing school that a typical marketing budget will be between 1 to 20% of turn-over depending on the business. This is dangerous!
The way to look at marketing and sales is not to estimate a marketing budget but to ask your self the question 'what is the total sales and marketing cost as a percentage of the final sale price?'.
If you rent a shop, then the shop's costs; rent, rates, electricity, staff, stock, should all count towards the cost of sale. The argument being that if you don't have a fully functioning shop, how can you sell anything?
Now you can see the attraction of e-commerce. In the digital shop your 'overheads' are lower, as it is much cheaper to build and host a website than rent and dress a town centre shop.
However, the web model has many hidden costs. The first is that your website is not located on Google main street but on a back water where no one goes!
The cost of moving your website from nowhere to somewhere is a lot. If you want it on the main thoroughfare of a busy digital street, it will cost thousands.
You may pay for your internet marketing with cash or effort and time but one way or another, it has to be paid.
Hence, when entrepreneurs say the internet is a cheap place to launch a product, they are half right. It is cheap to launch a product on the internet (build a functioning website, for instance) but equally, if you want to launch that product into a digital market place it will cost you a lot of money, time or effort.
The fact of digital life is that the costs of marketing have shifted, but they haven?t gone away.
Typically you should expect to spend between 75 and 90% of the sale price on marketing and selling. Here?s why:
A publisher gives 40 to 60% of his book sale price to the retailer. He also needs to run a PR and marketing campaign to support the book sales into the retail trade. The cost of marketing staff, their share of the office, computers, and coffee machine, is all directly related to the cost of sale. If the author also gets 10% of sale price, then 75% of the book sale price is gone before the publisher gets to pay for printing and delivery.
Businesses selling through network marketing pay up to 80% of a product's price in commissions to their sellers. With other head office marketing costs, up to 85 or 90% of the sale price may be spent on sales and marketing.
Or take a law firm. If it earns £1,000, what is the real cost of sale? Well, firstly, the lawyer who delivered the work needs to be paid and then marketing costs come on top. Salary costs will cover almost 70 to 80% of revenue with a further 5 to 10% making up the actual marketing costs. Again, we are at 75 to 90%.
So, any marketer who tells you that you need a marketing budget of 1 to 20% to sell your product has simply misunderstood business.
Expect that 75 to 85% of the final retail sale price will go on marketing and sales.
So, how do you use this information to build a successful business?
Firstly, nail down your production or service delivery costs by making the process as efficient as possible.
Secondly, move your marketing costs onto a variable basis. So, no sale, no cost ? this is effectively how you manage retailers.
Thirdly, hire your marketing staff on a freelance basis. This allows you to increase and decrease resource according to how the market reacts to your product or service.
Hiring freelance marketing services also allow you to make mistakes quickly and adapt without spending too much money. You may need to sell at a higher price with a premium brand. Or equally, you may need to test more cost efficient ways of reaching your market.
In the early days use the marketing budget to make small mistakes, adapt, adjust and tweak your product and service.
Find a way to source high quality, local freelance talent. This can be via online databases (such as www.People4Business.com or www.peopleperhour.co.uk, a local networking group or a dedicated freelance job event such as www.EntepriseFreelanceFair.co.uk).
But whatever you do don?t underestimate your marketing and sales costs.
Neil Lewis is the author of 100 Rules for Entrepreneurs and is organising the Brookson Enterprise Freelance Job Fairs to help entrepreneurs reduce their marketing costs.