When dealing with clients, I often get asked how much should I spend on online ads?
Now, quite a lot of people think that this is arbitrary, even some online marketing professionals. However, there is a method for working this out. I like to use it when trying to determine if an online campaign can work for a company. In other words, be profitable.
There are two main questions:
1) Can it be profitable?
2) How much can their cash flow withstand?
Let’s look at part one – Can it be profitable?
For those of you not familiar with financial management try not to be put off.
You should work out your Client Net Present Value over their relationship with you. If you just want one off sales, then the chances are, you won’t build a profitable campaign. The name of the game is client acquisition and relationship nurturing so you get repeat revenue year in year out.
For example, if the average contribution/profit per client per year is €1000, with the average relationship lasting 10 years and applying Weighted Average Cost of Capital (WACC) we find a discount rate of 15%.
Assuming you don’t increase your prices. Your NPV is €5,018.77.
If you can achieve a Cost Per Sale less than or equal to this figure then theoretically you can justify moving forward with the campaign depending on your cash flow situation.
Now on to part two – Cash Flow.
If you can achieve a Cost Per Sale less than or equal to the NPV, but are limited by cash flow issues, then use the cash flow limit as the price you can pay for a sale. For example, if your NPV is €5,018.77 but you only have the cash flow to cover €1,000 CPS then you should not pay more than €1,000 per sale.
So in this example situation, the company is prepared to pay the entire first year contribution/profit to acquire the customer who will stay with them for 10 years.
It’s important to do such analysis when researching a campaign. Understanding how much a new client is worth to you today is a fundamental element in building a successful online campaign.