Maximum Marketing Leverage

by Randy Martinsen on July 26, 2010

Joint Ventures: How To Gain $3.4 Million Of Good Will In 30 Days

One of the best ways I know to leverage your time and marketing dollars is to enter into joint ventures with other businesses. If you agree that your customers are your business’ most valuable asset, then you should see the potential profits available if another business will make its customers available to you. Available, that is, in the form of consignment of goods, an endorsement or a more integrated joint venture.

Joint ventures can work in one of two basic ways: first, you let other companies play off your customer base – and then take a percentage of each resulting sale. Or second, you work a deal with other companies to make their customers available to you then pay them a portion of each sale. The underlying principle of why this works is simple. Every business spends some finite amount of time, money, resources, and sweat developing relationships with its customers. These customers will have some level of confidence in that company, which translates into their willingness to respond to offers made by the company.

For instance, a company might spend $50,000 a year in advertising, $80,000 a year on commissioned sales people, and $5,000 a month for prime retail space. These three factors alone – not to mention dozens of other expenses – account for almost $200,000 spent a year to develop customer relationships.

Now, if you work a joint venture with the owner of that store, you can access all of that money spent for the cost of a letter. Let me give you a detailed, concrete example of what I mean.

If True Value Can Do It, So Can You

MYM Founder, Rich Harshaw, shares with us how he engineered a joint venture for Chris, the owner of a True Value Hardware store in a town of about 150,000 people. Chris had spent an enormous amount of money on inventory, advertising, and leased space over the nine years he’d been in business. During that time he developed a list of 1,600 loyal customers – people who knew Chris by name and came to him whenever they had a question about anything related to fixing or improving their homes.

The joint venture involved over 30 companies that offered all types of home improvement and repair products and services. All of the businesses became members of the True Value Service Center – a place where customers could find answers to any question about anything around the house.

Each business that wanted to participate was carefully screened and evaluated to make sure that they would offer True Value’s customers outstanding service and value. Only one business from each industry was permitted to participate. Each business then paid a $50 fee to join, which was used to build the service counter in the store as well as to send promotional materials to the customers.

At $50 apiece, Chris immediately raised $1,500 – more than enough to build the service counter in the store. But the $1,500 was only the tip of the iceberg. Chris negotiated deals with each of the businesses for a percentage of each of the sales that resulted from his customer’s use of the service center. The percentage ranged anywhere from 5% to 30% depending on the business and the kind of margins that the sale would bring.

The next step for True Value was to promote the service center. First, Chris concentrated on his current customers. A huge grand opening sale was planned for a Saturday in November. About half of the member businesses participated by setting up booths in the store to show their stuff and take orders for their products and services – it became the first annual True Value Home Show.

Each of the 1,600 preferred customers was mailed an invitation. They were to enjoy a 20% discount on any merchandise in the store that day, as well as special bonuses for large purchases. Also, each of the Home Show participants donated prizes that were given away – everyone of the preferred customers was guaranteed to be a winner just for showing up.

It turned out to be cold and rainy on that Saturday in November, but True Value still had its highest sales day ever – I mean ever! And it was 48% higher than the next highest day that year. The best part was that everyone who came found out about the service center. Over 30 service requests were tendered, with dozens more that came in the weeks that followed. The service center was an instant success.

The next step was to advertise to the rest of the people in that city. Chris took out an ad in the local newspaper, in the service directory of the classifieds. His ad told readers that instead of picking and choosing through all of the service ads and calling an unfamiliar company, they could make one call to have all of their problems solved. This headline summed up the service center:

“Before You Look In The Yellow Pages For Anything Around The House, Call Us First.”

Then Chris worked the back-end of his customer list. Every two weeks, he sent a 4-page newsletter to everyone on his customer list (which had added a couple hundred people by now). Each issue contained a feature article about one of the businesses that was a participant in the service center. The best part was that the featured business paid for the mailing – and Chris still got his percentage from each resulting sale.

Chris leveraged the entire operations of over 30 businesses. In essence, he became a landscaper, a drywall technician, a carpet cleaner, a fence builder, etc. without having to make an investment in those areas. His customers wanted those products and services and they trusted Chris’ judgment. If Chris said these were the companies to do business with, they were going to listen to his recommendation

The participating companies leveraged Chris’ entire customer list by entering into the joint venture. Basically, they paid $50 plus a percentage to gain over 1,600 customers who would use them in good faith. Now that’s leverage!

There are thousands of ways to construct joint venture deals. You have to be willing to actively pursue and put together deals. When you present another business owner with a proposition, your approach is all-important. Just like all good marketing efforts, you want to preach benefits to him immediately. Don’t just go up to him and say “Will you endorse my product to your customers?” You have to paint the picture first. You have to help him understand how it works. Not everyone understands the dynamics and leverage like you do.

This concept can be applied to almost any kind of business successfully. We’ve used joint ventures with retail, business to business, consultants, professionals, and any other business you can name.

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How To Tell If An Ad Costs Too Much

by Randy Martinsen on July 12, 2010

People say it all the time: “This advertising costs too much!” They practically go into cardiac arrest when they see how much the advertising for certain media in certain markets is going to cost them. It is pretty easy to get sticker shock when you see that a 60-second radio commercial on a popular Los Angeles station could cost you a thousand bucks – each. Or when you realize that radio spots on top stations in the San Francisco market cost as much as $2,500 – a MINUTE. Or when you realize that a newspaper ad in your city barely bigger than a Hershey bar will cost a couple thousands dollars. It’s easy to automatically think that’s a lot of money. Now here’s the important question for you, the advertiser: does the ad really cost too much?

So what’s the answer? The savvy advertiser will tell you that the cost of the ad is not the issue. What’s important is the return the ad will bring. If you were charged even as much as $40,000 for a 60-second radio commercial that generated enough sales to make you a profit of $50,000, then would the $40,000 be A LOT? The answer is NO! Of course not! You’d be a fool not to beg, borrow or steal the $40,000 so you could make the $50,000 profit! Try getting that kind of return in the stock market! How do you think that these big companies can afford to spend a two million for a 30-second TV commercial during the Super Bowl? They know that an enormous amount of people will see it – enough to make the return on investment a good deal.

The point is simple: you’ve got to figure out how much money an ad will make you before you draw a conclusion of whether or not it costs too much. So how do you do that? It’s actually pretty easy. Here’s a simple process for determining the Return on Investment, or ROI, of an ad. First, you’ve got to know how much profit you make on each sale. For instance, if you buy it for $50 and sell it for $100, your gross profit is $50. Second, figure out what your closing ratio is. If, on average, you close one sale for every four people who inquire, that’s a 25% closing ratio. If 9 out of 10 end up buying, then your closing ratio would be 90%. This is simple math. Third, figure out what your break even is. Do this by taking cost of the advertisement and divide it by the amount of gross profit per sale. Remember, we already figured out what your gross profit is a second ago. So how much do the ads cost? If the ads cost $1,000 and your average gross profit is $50, that means you’ve got to make 20 sales to make back the $1,000 – that’s your break even point – in this example, it’s 20 sales. Fourth and last, figure out the number of leads you need to generate from the ad if you are to break even. To do this, you’ve got to know your closing ratio, which we just figured out also. Let’s say it’s 25%, or in other words, you close one out of four people who inquire. So if you close 25%, and you need 20 sales to break even, that indicates that your $1,000 worth of advertising needs to generate 80 leads to break even.

Now I know that all sounds kind of complicated, but it’s actually pretty simple. We just calculated in the example that if the $1,000 ads can generate 80 leads you would break even. That’s a return on investment of 0. I’m not saying that your goal is to break even. I realize that you are in business to make a profit. But let’s start with breaking even; that’s the bare minimum you can accept when running an ad. At least you didn’t come up with a NEGATIVE return on investment! So let’s say your goal was to double your money. What would have to happen to your numbers? That’s right, you’d have to double your lead flow, or in this case, generate 160 leads instead of just 80. That means that if you generated 160 leads, you would generate a profit of $1,000 – again, on $1,000 spent. In other words, you’ve doubled your money. Your return on investment is 100%. That’s pretty easy to follow, isn’t it? By way of review, what we’re trying to do is calculate your return on investment for your advertising. Here are the four steps again. Think about your numbers in your business.

1. What’s your gross profit per average sale?

2. What’s your closing ratio?

3. What’s your break even – in terms of number of sales needed? How many leads does your ad need to generate for enough sales to break even?

4. What’s your return on investment on any given number of leads that you generate?

Now realize something important here. What we’ve just done in this exercise is figure out how many leads you need to generate to break even on the cost of the advertisement and then calculate the ROI for how ever many leads your ads end up generating. That’s a good piece of information to have, but now I want to take it a step further. Let’s figure out what’s known as the Lifetime Value of a Customer. What if your average customer brings you a $50 gross profit per sale like in the example we just went through? Is that the only time that customer will ever buy anything from you? How many times does that average customer come back in the course of a month or a year? If your average customer shops with you one time a month and makes you $50 gross profit every time, that customer is now worth $600 a year – in profit. And if you know that your average customer stays with you for 3 years, now that $50 a month client is worth a tidy $1,800. So now how much would you be willing to spend to accrue that client? What if those were your average numbers, $50 a month for 3 years. Then in the example earlier, remember where we broke even with 80 leads and just 20 sales? Now those 20 customers would be worth an astounding $36,000 over the next three years. And it only cost you a thousand dollars worth of advertising. Now your break even looks a lot better, doesn’t it! If you could accrue a $36,000 annuity every time you ran a thousand dollars’ worth of ads, you should mortgage your house and spend as much money as possible on advertising!

Now, a couple of words of advice when figuring your return on investment for advertising. Always estimate your numbers conservatively, or in other words, on the low side. Always figure on getting a lower number of leads than you’re hoping for and expecting. Always count on a lower closing ratio than you’re used to. If you calculate your numbers using conservative figures, then you’ll do fine if your results are actually lower than projections and in the event that you do as well as you had initially hoped, you’ll just make more money than you expected.

Let me give you a real life example to better illustrate ROI. There is a company that was promoting seminars where they would attempt to sell a service that cost $8,000. When they were starting to do advertising to promote these seminars, the question of how much budget should they afford came up. They wanted to start filling seminars with about a week after starting advertising, so they decided that fax broadcasting would be the best way for them to quickly get the message out about the seminars. Faxing can be done for as little as 7 cents per page in some major metropolitan areas, and even with the new laws around “opt-in” and “relationship” faxing it seemed the most effective method to get directly into businesses with a target for the seminar, so they came back and said they wanted to send out about 25,000 faxes a week for the 5 weeks they would be doing seminars. When asked how many sales were they planning on generating, they said because of a unique financing plan that allowed them to sell their package on a low monthly payment basis, they thought they could sell at least 100 packages in that 5 week time period.

Well, 100 packages is a lot and they were told that they would have to do at least 100,000 faxes a week for the 5-week period to get the number of leads required to sell that many packages. The man got his calculator out and did some quick math and realized that he had to spend $35,000! 7 cents times 100,000 faxes times 5 weeks! That number – $35,000 – sounded so huge it caught him off guard. His idea was to spend just under 2 grand a week or a total of less than $9,000. Big difference. That’s called “sticker shock.”

So what he did was figure out the ROI, according to the steps previously explained. Again, first figure out your gross profit per sale. His was about $3,250. Second, figure out the closing ratio. He expected this would be about 20%. So then, how many sales would he need to break even on a $35,000 advertising expenditure? Well, 35 thousand divided by $3,250 gross profit per sale is about 11 sales. Just 11 sales to break even. So if his closing ratio were just 10%, he’d have to generate about 110 leads to break even. 110 leads on 500,000 faxes? Statistically this is easily attainable even with poorly written materials. The last thing to do would be to figure out how many leads he’d have to get to reach his goal. His goal is 100 sales and his closing ratio is 10%. That means he’d have to generate about 1,000 leads. On 500,000 faxes sent out, that’s like a two-one-thousandths of a percent response. That is very reasonable. He’d generate a total gross profit on the deal of $325,000 and if you subtract the $35,000 advertising cost, that’s still a healthy gross profit. His attitude toward the $35,000 changed instantly.

Do you see how this analysis can work for you? Just run through your numbers and you’ll know how much money is a lot of money when it comes to advertising.  If you want to have me help you through this process, just send me and email or call for an appointment and I’ll be happy to help you.

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