Online marketing is an investment not an expenditure

May 25th, 2011 Posted by Website Engineering 7,697 comments

Not all businesses will benefit equally from an online marketing strategy, even a well-executed one.

Some will see more sales, some will just gain visits and visiblity. Some might almost nothing from it. Take the example of a large pipe manufacturer for instance. Or that of a supplier of equipement and services for offshore oil platforms. What are the chances they can lift their next contract off the web? Nil. These guys have websites for show only.

But these are extreme examples. Much closer to home, a small mom & pop grocery store is harly a likely candidate for an online campaign. Unless you use mobile marketing… maybe. But this is a risky bet – at best.

It behooves local search consultants to pick carefully which businesses will most likely benefit from their advices, and avoid contacting those enterprises which won’t:

  • be able to afford their services, or
  • derive significant benefits from them (in terms of revenues).

The local search consultant must absolutely remain the trusted advisor of his clients, and should always perform a thoughful cost/benefits analysis before embarking a business in any sort of an expense.

The recent publication by Sageworks – a financial information company – of its 2011 List of Most and Least Profitable Industries in the U.S. offers consultants an additional element of guidance in their selection of targets.

Analyzing these figures

The rankings published by Sageworks clearly show that accountants, dentists, lawyers and some healthcare professionals generate net margins in excess of 15%. A second tier – mostly professionals – generate profit margins of 10 to 15%. These include MDs, morticians and funeral homes, and perhaps surprisingly, photographers.

At the bottom of the table, the construction industry, with thin margins of 0.5% to 2.0%. This section mostly features larger size enterprises: manufacturers, contractors, wholesalers.

Despite the fact the economy was still in the doldrums in 2010, certain professions proved to be shielded against hard times. All the top-tier trades are of the business-to-consumer type, the web brings them business, and they can afford an internet marketing strategy.

What about the bottom tier? Contractors, cabinet makers dealing directly with consumers, harware resellers, all will benefit from an online marketing strategy. But their margins are thin and therefore call for sound thinking. The blueprint of a strategy for a national kitchen cabinet manufacturer cannot be the same as for a local attorney. The tools put into use will be different.

Pricing strategies for the bottom tier

Though building contractors typically handle larger cash-flows than attorneys or accountants, their thin margins (1.35%) restrain their capacity to afford the rates usually offered to dentists.

They should be canvassed though, as they can recoup a year worth of internet investment with just a couple of good residential building projects. Your proposal just has to  be clearly articulated.

A typical contractor will be detail-oriented in his analysis of your offer. They usually itemize their quotes and pay attention to cost overruns as changes in labor and material prices will impact the profitability of a construction site. For a general contractor, this may mean the difference between surviving a recession and filing for bankruptcy.

Any quote submitted to a contractor should be itemized to detail very exactly what service will be delivered for how much. A modular quotation [allowing picking among services] might win the day. A result-based proposal would help putting your quote ahead of your competitors in a bid.

Tie up your compensation to measurable deliverables (e.g., ranks gained in Google; number of A-B-C positions gained in Google Places; quotes obtained directly from the website…). Any quote that is tied to results indicates a high level of confidence in your capacities, often enough to sign up a business strapped with thin margins.

To ensure your client does not default on you, build an ‘ownership reserve provision‘ in your proposal: this clearly make the transfer of ownership of the website URL conditional to the final payment of monies.

Selling to the top-tier

Local search consultants know that dentists and chiropractors have extra cash to spend. If you really get results (i.e., #1 or #2 positions in Google Places), serving a dentist means a handsome payday.

Dentists, chiropractors, attorneys, CPAs don’t want to deal with their websites. They prefer to pay a qualified professional who will get results, even if the cost is high.

Kevin Wilke, founder of Local Business Money Machine, recommends discussing the lifetime value of a client before setting your consulting fees.

Let’s follow his approach, and establish a sound financial model by calculating Lifetime Revenues (LTR) and Lifetime Gross Profit (LTGP).

Lifetime Revenue and Lifetime Gross Profit

Definitions:

LTR (long-term revenue or lifetime revenue): Total revenue generated by a customer over the course of his involvement with your service.

LTGP (long-term or lifetime gross profit): Profit margin generated by this customer. Calculated by substracting the cost of acquisition of the client from the revenues generated over the course of doing business with you (revenues – cost of acquisition = lifetime gross profit).

Example: Chiroprator’s office

A new patient at the chiropractor’s office will usually receive 2 exams with x-rays per year, an adjustment every 2 weeks (20 per year), and inflict on himself a back injury requiring acute care for a couple of weeks (6 extra adjustements, tests, 1 exam, 2 deep-tissue massages). He will also buy supplements to correct other problems such as digestive and muscular issues, or in the case of women menopause and hormonal issues.

The average patient will spend $2K-$3K a year in chiropractic care.

Patients will bring their families (2 adults, 2 children) for treatment, i.e. an extra $4K-$5K revenues for the clinic per year.

The average family moves to a new home every 5 years, and find a new doctor. Over the course of these 5 years, this family will spend a handsome $30,000-$40,000 at the chiropractic clinic.

This is the LTR of this family.

Assuming that the chiropractor spends $60,000 a year in advertising to get an average 5 new patients a month. The cost of acquisition of a client comes to $1,000 [$60,000/(5 x 12)]. The cost of acquisition of his family: 3 free exams.

Over the course of the next 5 years, our doctor will offer $500 of free service per member of this family to keep their clientele. This expense will bring the cost of acquisition of the whole family to $3,000 over 5 years [$1K + (4*$500)].

The LTGP (gross profit) will come to between $27K [$30K – $3K] and $37K [$40K – $3K]. The advertising expense per client does not change at $1,000 over 5 years (i.e. between 2.7% and 3.7% of the LTGP – very reasonable).

According to Sageworks the average net profit margin of a chiropractic clinic is just over 16%. Assuming conservatively that the chiropractor keeps between $4.8K and $6.4K over 5 years from this family [$30K * 16%, or $40K * 16%], that’s $960 to $1280 in net profit per year for each new client gained through advertising. These are very conservative estimates.

Multiply this by 60 new clients per year, and the increase in net profit amounts to between$57,600 and $76,800 in the chiropractor’s pockets.

Putting the proposal together

For the sake of prudence, we assume that the online strategy just replicates the results of other advertising channels. The same advertising expenditure ($60,000) will bring the office an additional 60 patients during the year, or an additional $57K-$76K to the doctor in net profit before taxes.

But with patients increasingly resorting to the web and local search results as a source of information about local businesses, a good online marketing strategy should not only yield better results, but also diminish the advertising budget for other channels.

Show this clearly in your proposal. Show the possibilities offered by linking offline advertising (print media, Yellow Pages, cable TV) to online advertising (website), thereby leveraging the new assets of the practice (its website).

Calculating the LTR and LTGP during the prep stage of the consultative selling process will help construct your proposal with a deep knowledge of your client’s business.

Instead of offering the client to ‘spend more money’, you will now present the client a real ‘investment case’.

Cash-flows and assets

Doubling the number of patients during the course of a year will result in expanding the chiropractor’s office much faster.

For a doctor, it means being able to retire faster after selling his/her practice at a higher price.

In essence, implementing a well-thought online strategy drastically increases the value of the business concern (the practice).

If the chiropractor (or dentist) can show his average patient remains a client for 5 years, and that his practice almost doubled its size each year in the last 2-3 years, it becomes possible to value the practice on the base of its revenue potential (based on LTR), its gross profit potential (based on LTGP) and its net profit potential 5 years out.

In essence, this well-constructed online marketing proposal builds an investment case with a predictable return, and moves away from the ‘pain of spending more’.

This predicament is a whole lot better for your client and your consulting firm.

Thank you for your attention.

To your success,

Phil Chavanne