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Mistake #25

Underestimating Marketing Costs And Overestimating Results

Many small business owners make the mistake of being unrealistic about marketing costs and overestimating results. I plead guilty to this one. You can’t predict with 100 percent accuracy, but you can improve the quality of your predictions.

Many entrepreneurs, who by nature have relentless enthusiasm, wrongly assume that customers will beat a path to their door. It usually doesn’t happen. The inability to adapt to these unpredictable swings in revenue stalls many businesses. When you don’t know how much revenue is coming in, it’s tough to balance expenses. And, you won’t survive long if you can’t manage your company’s cash flow.

Costs You’re Likely to Underestimate

What’s the best may way to avoid these budgeting problems? Knowing where you might make mistakes. Here are some costs you’re likely to underestimate:

 The cost to acquire customers. I mentioned the importance of CAC (customer acquisition cost) in mistake #10, No Metrics. It varies from industry to industry, but the cost to acquire a customer is usually three times more expensive than you think it’s going to be.

 The cost to retain customers. Customer retention is just as tricky for small business owners. Customer retention can be a big problem and often costs far more than anticipated.

 Opportunity costs. Opportunity costs are the costs of not doing something. If you make that spur of the moment purchase on Facebook advertising, what’s that causing you to forgo?

 Impulse purchases. We’ve all heard the old axiom, “It takes money to make money,” but this old saying often leads young entrepreneurs to gross overspending. When you make impulse purchases, go back and recalculate your budget to see the impact.

 Indirect costs. Indirect costs are those times when you say, “Yep, I should’ve thought about that.” They are less noticeable and seem to come out of nowhere. Think through every step of a campaign and try to predict as many costs as possible.

 The time. “Time is money.” Most business owners don’t know how much time marketing takes. It could be as much as 50 percent of your time in the early stages of a company. There is a time cost to any initiative, including those things like blogs, social media, and publicity. Make sure your time is well-spent.

How to Be More Accurate

Here are six ways to become more accurate in your forecasting:

 Always overestimate marketing costs. If you’re like most entrepreneurs, you’re going to be overspending. Make sure to prepare for the worst and plan for your marketing costs to be higher than anticipated. Don’t assume that all campaigns will be successful; you will have some losses.

 Track everything. Keep track of campaign costs, vendor prices, costs of software, time spent, and anything else you can think of to assist in your analysis. Tracking results are one of the fundamental principles of my Lean Marketing program.

 Use 3-point estimating. Three points are used in estimating: optimistic (O), pessimistic (P), and most likely (M). If you’d like one number, try the following weighting: (O + 4M +P /6).

 Stash away cash. Any business should have two or three months of money reserved for emergencies. I recommend you do the same thing for marketing. When you have campaigns that are producing better than expected, take some of the additional funds and put them in a separate account for marketing. Trust me, you’ll need it.

The real problem with underestimating costs and overestimating results is part of being an entrepreneur. We are relentlessly optimistic; otherwise, we wouldn’t have started our companies in the first place. However, make sure your enthusiasm doesn’t compromise your objectivity in managing your marketing spend.