Return On Investment of Marketing Expenses

Potential clients frequently ask why I refer to the cost of my consulting and copywriting services as “investments.” Here’s the answer…

A business in a service industry like architecture markets to attract new clients. There are two primary reasons to attract new clients: first, is a desire to maintain your current level of projects so your business is steady; second, is a desire to increase revenue enough so your business can grow.

In both cases, you must pay attention to measuring the Return on Investment (ROI) of your marketing costs. Please remember that I am not an accountant! The following is not advice about your business accounting practices.

To begin let’s separate your business into two major categories – necessary direct costs versus discretionary support costs.

Necessary direct costs are the things without which your core business cannot function. Examples include labor, office space, equipment, and overhead (such as pencils, paper, and operation of vehicles), etc. You cannot avoid these costs because they are necessary to your business functioning. You can, and should, control the amount you spend on them because they directly affect your profitability.

Discretionary support costs provide support for the core business, but are not necessary to producing your core product. This category of expense includes marketing. That is because you can actually choose not to spend any money for marketing. Your business would keep going, at least for a while. However, you most likely would find your business diminishing until you have no new work.

I view marketing costs as investments because they are discretionary. They are not part of your core business. However, they can have a dramatic impact on the success of your business. That is because obtaining new clients directly increases revenue, which potentially leads to higher profitability. Therefore, I would argue there should be at least a minimal level of marketing money spent.

The minimal level of expense would be targeted at maintaining existing clients that have a high potential for repeat work. The financial commitment of that level of marketing is relatively low. Therefore, you must not delude yourself that you can dramatically increase your business with a minimal level of marketing expense.

Beyond the minimal level of expense and labor of marketing, you have discretion over if, and how, to spend resources. It is at that increased level of commitment to grow that you must be concerned with ROI. However, initially it can be difficult to project what ROI to expect from given choices.

For that reason, it is very important to track marketing performance. That means tracking the number of new contacts and the value of new contracts signed on a regular basis. I recommend you track contacts and contracts on a rolling 12-month basis.

With that data, you can compare changes made to expenditures versus new revenue. This will provide you with a measure of how much increase in revenue occurred after specific changes in expenses. That difference will be the Return on Investment of marketing expense.

Initially you will have to make choices using your best judgment about spending. You must answer the question, “How likely will a given marketing choice produce another client that we otherwise would not obtain?” Once you have at least a year of actual history, the ROI will become clearer. You will then have a measure of Return on Investment that will inform you future marketing decisions.

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