Red or Green?

Wayne Hurlbert wrote about patterns of small business failure. One such failure is not knowing the true cost of doing business. Then when things get tough, the small business will cut corners, usually by cutting the marketing budget… And skimping on its website.

I disagree with Wayne, however, on one point. He says, “Cutting corners, at the expense of current and future customers, is not a wise idea.” But if things are getting tough, it might be better for the business to have fewer customers.

Let me explain what I mean.

Coincidentally, conversion specialist David Bullock recently wrote about this same profitability problem. The sad truth is that most small businesses, even the successful ones, don’t really know how much they make off of each sale. And even fewer of them know how much each of their customers is worth.

And if you don’t know how much each customer is worth, you don’t know how much it’s worth it to you to acquire a new one.

Perry Marshall has a thought experiment that sums up the issue perfectly. Imagine you had a magic gumball machine. Except instead of dispensing gumballs, it dispenses customers. You put in some money, turn the crank, and out pops another customer for your business. How much money would you be willing to put in the machine to get another customer?

Until you can answer that question, you’ll never know how much your website—or any marketing effort—is worth to you. Thus, you’ll see it only as an expense, not as an investment.

Recently I was talking to an old friend, the first time we had talked in a long time. Like me, he owns a small business, in his case a local camera shop. We naturally got to talking about web sites. He told me his business spends $4 a month on its website, because that’s all they can afford.

“But what if,” I asked, “you knew that this $4 was buying you $100 in extra profit? Then would it be all you could afford? Would it be worth spending another $4 to get another $100 profit?”

It is an aphorism that you can’t control what you do not measure. That’s why it’s so important to measure your website’s performance. Not in terms of web traffic, but in terms of how much it makes. As David Bullock noted, “Marketing gets the word out about your product or service. But if the product is not selling [or is not even making money], what good is it to get the word out? The answer to increasing profits is not always a blanket more traffic and more eyeballs.”

-TimK

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