By Tom Panaggio
Is marketing an investment or an expense? Many business owners say that it’s an expense, but they are wrong. Investment means an outlay of money with an expected return, and there is no question that marketing can produce an exceptional return.
Return generated by a good marketing strategy includes sales that become revenue plus the extra benefit of creating an appreciating asset: your customer database. Like any investment, there is an associated risk, but we embrace risk for the reward it brings, namely, an opportunity to sell.
Don’t get bogged down by accounting terminology.
The idea that marketing is an expense comes from the way it is accounted for on a business’s financial statements. Accounting rules dictate that any outflow of money must be shown as an expense, because accountants cannot measure future value. However, if we examine a marketing investment in the same way we would a financial investment, it becomes obvious that marketing should be classified as an investment.
Here’s an example of what I mean: If we invest $5,000 in a marketing campaign that produces one hundred interested customers, and these customers have an average lifetime value of at least $60, then we enjoy a 20 percent return on our investment. Additionally, we now increase the value of our customer database by adding a hundred new potential customers. Of course, the actual return depends on many factors, but this illustrates that dollars invested can produce a quantifiable, measurable return.
Marketing isn’t a luxury.
Classifying marketing as an expense is misleading at best, and incorrect at worst. By adhering to this erroneous belief, entrepreneurs trap themselves into believing that marketing is a luxury rather than a necessity. As a result, business owners tend to make two critical mistakes: not budgeting for marketing a launch, and cutting the marketing budget when revenues sink.
For some entrepreneurs, the last thing on their minds is developing a marketing plan and establishing an appropriate budget. They will usually save or raise enough capital to buy the business, rent space, purchase office equipment, hire staff, and even secure inventory, but they forget about the engine that drives a business: marketing. Too often when entrepreneurs start out, they forget to have a marketing strategy ready to execute from day one. This is especially important if you are planning to start a retail business: no marketing equals no customer traffic equals no sales and no more business.
The second critical mistake occurs when revenues drop or a business struggles. In these scenarios, the first budget item business owners frequently cut is marketing. How ironic. Choking off the fuel to power a business creates a situation that makes revenues decline ever further and faster. Reducing costs is often necessary when revenues decline, but a business cannot save its way to prosperity. Therefore, it’s more prudent to increase your investment in marketing, particularly if your competitors are treating it as an expense that they cut back.
Remember, your unexpected edge is the result of embracing risk, continuously. When your competition avoids investing in marketing, especially in a down market, they are giving you an opportunity to take customers. And when no risk is taken by spending money on marketing, there is no resultant opportunity either. Clearly, from the perspective of an entrepreneur who wants the risk advantage, marketing is a wise investment.
© 2014 Tom Panaggio, author of The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge
Tom Panaggio, author of The Risk Advantage: Embracing the Entrepreneur’s Unexpected Edge, has enjoyed a 30-year entrepreneurial career as co-founder of two successful direct marketing companies: Direct Mail Express and Response Mail Express. As a result, he can give a true perspective on starting and running a small business. His practical approach to business concepts and leadership is grounded in the belief that success is the result of a commitment to embracing risk as a way to ensure opportunity. For more information please visit http://theriskadvantage.com, and follow the author on Facebook and Twitter.