How Can You Improve Your Marketing Spending?

And that started a relationship that would last the next 20 years.*

Ziya decided to take a sabbatical about three years after I started working at Maxim.   He came back from his sabbatical six months later with a concept that would change the way Maxim evaluated potential engineering projects going forward. It was called RODT or Return On Design Time.

The idea was pretty simple. The most precious resource in an Analog IC company was its design engineering talent.

So, if you took the gross profit a product generated over its lifetime and divided that by man months of design time required, you would have a number to compare projects by:

RODT = (Estimated Gross Profit of a product over its lifetime)/(Man Months of design time)

Now you could easily compare any project and know how one project stacked up versus another project. The theory went that you could pick the highest return projects to work on.

I took the RODT concept with me, and we used it at Touchstone to evaluate various engineering projects. The RODT formula worked really well for us. However, one question bugged me, “How would we evaluate the success of our marketing efforts?”

One of the things that always surprised me at Maxim was that we didn’t have the same rigor to evaluate our marketing efforts. Now marketing was a big deal at Maxim; at one point we were spending 10% of our revenue on marketing.

But we never really measured its effectiveness. We just knew it was effective.

I was determined not to make that mistake again. So, I remembered Ziya’s brilliant RODT concept and modified it for marketing.

Enter ROMS or Return On Marketing Spend.

I know, it’s not very creative, but ROMS does get the point across. You want to be able to measure the return on your marketing spend.

You have multiple marketing channels to choose from. Each of these channels has a cost associated with it and a return associated with it. And the most important return for marketing being revenue and your time.

Ideally, you want to emphasize the channels that give you the greatest return. But just like a product has a Total Available Market (TAM), so does your marketing spend in a channel.

There’s only so much capacity a given marketing channel has. Your mission is to know what that capacity is and then to optimize that capacity.

I’m going to walk you through a simple four-step process to determine the return on your various marketing channels. First, you have to choose which marketing channels you’re going to evaluate.

In their excellent book, Traction, authors Gabriel Weinberg and Justin Mares, outline 19 potential possible marketing channels you can choose from:

1. Targeting blogs
2. Publicity
3. Unconventional PR – like publicity stunts
4. Search Engine Marketing – Google Adwords and Bing
5. Social and Display Ads – Facebook and Twitter
6. Offline Ads – TV, Radio, Newspaper
7. Search Engine Optimization
8. Content Marketing
9. Email Marketing
10. Viral Marketing – referrals
11. Engineering as Marketing
12. Business Development
13. Sales
14. Affiliate Programs
15. Existing Platforms – websites
16. Trade Shows
17. Offline Events
18. Speaking Engagements
19. Community Building

I’d recommend you choose three possible target channels to compare if you’re just starting out. Then just follow four these simple steps:

Step 1: Determine the capacity in a given marketing channel. 

This is a critical step you must do. For example, let’s say you’ve determined that you’re going to start out running Google ads.

You need to figure out, as best you can, how much available capacity for ads the particular keywords you are running has. This will give you an idea of the reach your campaign can have.

Then you can estimate the percentage clicks a campaign will have. Google makes this easy by showing you if you bid $X you will likely get Y% clicks. We’ll come back to what this all means in a bit.

Step 2: Determine the cost of the campaign.

Some channels, like email, are virtually free. All you have to pay for is the cost of maintaining your list and the time it costs to compose the various emails you will write.

Other channels, like paid advertising, cost you money.

Whether it’s your cost per thousand (CPM) or cost per click, you need to know your costs to determine the viability of any channel.

Estimating the money you’re going to spend should be relatively easy. You can set your budget if you’re using adwords or Facebook. If you’re doing other types of media buys, you can estimate this as well.

And don’t forget your time too.

There’s a big cost to the time it takes to create and manage a campaign. You need to account for that as well.

Step 3: How many customers will you get?

Every activity that brings you a sales lead you can classify as marketing. If one of your strategies is going to conferences and speaking, and a certain percentage of the customers give you their business cards, and a certain percentage of these customers become customers, then you can gauge the effectiveness of going to conferences.

Step 4: Put it all together.

What you’re looking for is the Return on Marketing Spend (ROMS). Your goal is getting the most out of your marketing dollar.

Choose three potential marketing channels to evaluate. Let me illustrate with the example of estimating the return on speaking engagements.

Your product in this example sells for $5,000. The cost of going to the speaking engagement is (in hotel and airfare) $2,000.

You spent 20 hours preparing your talk and you spent another 10 hours exclusively on the event for 30 hours total. Oh, and this is an unpaid speaking event.

You estimate your time is worth $300/Hour, so the time cost is 30 hours x $300/Hour or $9,000. The total cost of the event is then $9,000 + $2000 = $11,000.

The $11,000 is your marketing spend.

You believe you will get four customers as a result of the meeting, so the speaking engagement will net you $5,000/customer x 4 customers = $20,000.

So the estimated ROMS for this channel is $20,000/$11,000 = 1.818. This means you estimate that for every one dollar you spend, this channel will give you $1.818 in return.

Then you go through the same exercise with the other potential channels you’re thinking of using.   You compare the results of this potential marketing channel with the results of the other potential marketing channels you’re thinking might be good fits (Google adwords and Trade Shows).

You estimate Google adwords will give you a return of 2.2 and you estimate Trade Shows will give you a return of 1.3.

It appears that Google adwords is probably your best bet. As one final check, you look at the capacity of the keywords you’ve choosen, and you realize, if your campaign is successful, you can add up to 20 customers per month or $100,000 per month in revenue using Google adwords.

You decide you will start your marketing plan with Google adwords.

Two key pieces of advice before you start spending your money:

A.  Start off with one marketing channel if you’re just beginning your marketing program.

Get that channel working and then move on to the rest.

B.  Start off with a test of the channel if possible.

In the example above, you would need to spend over $45,000 ($100,000/2.2) to add 20 customers. Instead of spending $45,000 straight away, you spend $1,000 to make sure the quality of the leads is high before you start spending more money on the channel.

I learned a lot working with Ziya, and we had a lot of fun doing it. He was a great friend and mentor for the rest of his life.

One of my favorite memories of Ziya is at my wedding. He said to me after meeting Blossom, “You have chosen well.” That always puts a smile on my face.

*Ziya moved back to his native Turkey shortly after I got married. He taught entrepreneurship at Sabanci University in Turkey. He was heavily involved in Entrepreneurship in Turkey. Sadly, Ziya passed away at much to young an age a few years ago.

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