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Be Careful not to give the Right Answer to the Wrong Question

October 1st, 2020

When you’re working with clients as an adviser they’ll often ask you what seems to be a simple question like “what do you think my marketing budget should be?

That’s a reasonable question and you might say “let’s check what the industry norm is for that and we can take it from there?”

So you waddle off and discover that a recent industry bench-marking study revealed that the median marketing spend for businesses of roughly the size of your client’s is 6% of revenue.

That’s a great answer if the question is “what is the median spend on marketing for businesses of my size in my industry.” But that is not what the client asked you.

A much better answer would have been, “that’s a great question but I suspect a better way to frame it would be: what cash return are we getting from our marketing investment at the moment?”

The reason that’s a good question is because the answer to it will lead to another question. If the answer is you’re not getting anywhere near a good enough return you need to revisit your marketing plan.

But suppose you learn that within a specified period of time, $1 of marketing investment is generating a gross profit of $5 then it would make sense to invest as much in marketing as your immediate cash position and production capacity can accommodate.

So the next question is how much additional capacity do we have or could we create through operational improvements. Another question would be, how much sales growth can we support with our resource base – i.e. what’s our sustainable growth rate?

Another question would be, are there other investment opportunities in our business that we expect can give us better then a 5:1 GP return over a similar time frame?

Yet another question would be “if we have other terrific internal investment opportunities that require funding, should we immediately go and look for more funding? And if so should that take the form of debt or equity?

Now, getting back to the original question, the appropriate answer could be phrased as follows: you should invest as much as your resources and production capacity allow as long as the return from marketing exceeds your investment.

The same question should be asked of every one of your expenses – what is their ROI?

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