Revenues Minus Costs Equals Profit
Several times a month, we visit with local business owners who ask us a very common question – “What should I be spending on marketing and advertising?” While our ability to help answer this question is getting better, it’s still a challenge when they are just looking for a quick answer as a dollar amount. What we have seen that is consistent is local business owners being successful by understanding a very simple formula that helps them make decisions. This simple success formula for local business is Revenues minus Costs equals Profit.
One commonality we have found with successful business owners is their ability to simply the complex when it comes to leading their business. Don’t let me miscommunicate here… the details of serving clients with excellence are critically important for growing a local business. However, to keep growing a local business and continue to keep it healthy, many business owners tend to simply what many people make complex.
How Does This Success Formula Help Determine Marketing and Advertising?
Local businesses led by the business owner who understands this success formula usually have good local marketing practices in place as well. The business leaders of these local businesses understand that there are several moving parts within the Revenues minus Cost equals Profit equation, but they also know the importance of watching the key investments that drive the business – marketing, sales and service. So when it comes to marketing their services, they realize the formula is not magic.
Many local businesses allocate a percentage of revenue to marketing as a guide for their specific marketing needs. For instance, we have some very healthy, growing clients who spend as little as 3% of their revenues on marketing and some that spend over 15%. Both of their businesses are healthy, growing businesses, yet their business models are different – specifically how they allocate costs and margins on their services. At the same time, we have some clients that have a fixed monthly marketing expense that is revisited twice per year, yet stays pretty consistent with 10-15% growth year over year (depending on the growth of their business that particular year).
In summary, what we have experienced is successful local business owners lead successful businesses because they understand this formula and how to manage it monthly. Keeping business simple is sometimes the hardest thing to do, yet can also be very rewarding.