In my eCommerce business, we lose money acquiring every customer. I did the same thing at my agency. And even today, I’m looking for ways to lose more money.
Insanity? No, an understanding of how marketing REALLY works.
Marketing Drives Results, Everything Else is a Cost
“The purpose of business is to create a customer, the business enterprise has two — and only two — basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.” – Peter Drucker
Peter Drucker perfectly encapsulated why sales and marketing are the lifeblood of any business. Too many businesses view sales and marketing spend as an expense. The reality is that customer acquisition is the one area where you can take $1 and make it $2.
Marketing Creates Customers – Who Create Revenue
I’m going to say the obvious because it bears repeating. Without customers, you have no revenue. And without marketing, you have no customers. Marketing brings in customers, who bring in revenue. That revenue is the fuel of the business.
Think of marketing as the seed that allows the rest of the business to grow. No seed, no growth.
Customers aren’t just a one-time revenue event. They have significant lifetime value if retained and nurtured properly.
The lifetime value of a retained customer will likely be a multiple of what that customer originally spent. This makes acquiring customers one of the best investments a business can make.
That’s part 1 of why I’m losing money acquiring customers in my business … More on this as I explain:
Building the Marketing Machine
As you refine your sales and marketing machine, customer acquisition costs can decrease. Yes, even if the cost of ads are going up (if you’re not sure how, visit CEOworkbench.com for free trainings). Conversion get more efficient. Messaging improves. Targeting gets sharper.
This means that over time, the same marketing investment yields an increasing number of customers. The return on investment goes up.
Marketing is leverage.
If you’ve rigged your ratios right a small increase in marketing budget can result in a disproportional increase in customers acquired.
Cutting Marketing Cripples Growth
When times get tough, weak leaders look to cut expenses. Marketing budgets are frequently first on the chopping block. This is, simply put, stupid.
Cutting your marketing efforts during downturns means fewer customers coming in. This reduces revenue. Which then requires more cuts. Puts you into a dangerous death spiral.
When others are fearful, get greedy.
It’s the best time to acquire customers.
Right now, my ad costs are up. I’m paying 2.5x my average order value to acquire customers. But I’m doubling down – because I understand that cutting marketing is long term suicide, and I understand long term math.
Marketing Pays Compound Interest
Think of marketing as a flywheel. At first it takes a lot of effort just to get it moving. But as customers beget more customers (through upsells, referrals and repeat business) it starts spinning faster.
Suddenly that initial push pays compound interest. The momentum takes over. But it never would have happened without investing up front.
Many businesses want to pull profits out of the company as soon as possible. But the fastest growth comes from reinvesting profits back into marketing to drive growth.
This virtuous cycle compounds over time. Taking money out too early cripples the company’s potential.
Marketing at a Loss Isn’t Always a Loss
Marketing allows you to acquire customers now in order to profit from them later. This is the idea behind loss leaders (and many subscription sales) – selling something below cost in order to land a customer who will be worth more over years.
Loss leaders don’t make money on the first sale. But the lifetime value of the customer makes up for it many times over.
But loss leaders are one of the reasons business owners get afraid. They calculate on the short term, get afraid, cut marketing budget … and lose in the long term.
As long as the lifetime value of a customer exceeds the cost to acquire them, marketing works.
That’s where I usually live. I’m fine losing money on the front end, because I know what the customer is worth.
The only question I need to answer is “how can I float the period while I’m underwater on customer acquisition?” Your answer may be different from mine: it could be cash from operations, debt, investors, factoring … But the point remains:
Do NOT stop marketing just because you lose money on the front end. It’s more nuanced than that.
Market or Die
Marketing is the thing that will determine whether your business has cashflow in the future.
You can make the decision now to invest in it, or to call it a cost and deny the reality of how business works.
Cash is oxygen for a business.
And marketing generates the cash.
Want a worksheet to calculate your marketing effectiveness? It’s available for free at CEOworkbench.com
