Are you using your advertising dollars where it’ll do the most good?

June 23, 2014 by

So I was reading a book the other day called:

80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More (This links to Amazon, where I get a small commission for each purchase)

I found a lot of what he was saying in his book to be quite interesting. It also got me to thinking about how often business owners overlook what this means. The primary think he talks about in his book is the Pareto principle, what most people know as the 80/20 rule.

What this principle means, in a nutshell, is that 80% of your results comes from 20% of your effort. The remaining 20% of your results comes from the remaining 80% of your effort. It’s a statistic that holds up under quite a few different circumstances. In a sales department, it usually winds up being 20% of the sales force are making a majority of the sales.

Granted, it doesn’t always break down to exactly 80/20. Sometimes it might be 77/23, 82/18, or something similar. It’s close enough to make some pretty accurate guesses as to what might happen if you change X to affect Y.

Anyway, what’s surprising is, a lot of people know what this 80/20 principle means, but they don’t really take advantage of it, or they don’t believe it pertains to them and their business. The problem is, it actually does pertain to them in some form.

Whether it’s something as simple as turning your bookkeeping over to someone else because you invest too much time in it for the return on investment you get from it, or outsourcing your cold calls to a 3rd party company because the cost per lead from the telemarketing company is cheaper than how many you get from your employees who get paid by the hour, in some way, you are affected by the 80/20 rule.

Where this rule really starts to show up is when it comes to your repeat customers. What this principle says is, for every 100 repeat customers you have, 20 of them will bring in 80% of your revenue. Think about that. Possibly 80% of your advertising might be wasted on those 80 people who only bring in 20% of your revenue.

Most business owners don’t ever take the time to analyze their customer base in this way. If you do take the time, you can focus your advertising on the people who make up most of your revenue. Another way to look at it is you can be more straightforward in your advertising to the 20%, i.e. we have this for sale at X price. Think about how Apple© advertises their next iWhatever.

All it takes is a press release saying, “Hey, our newest widget is going to be for sale on XX date for $YY. See you there.” What happens? You have Apple© fanboys, and girls, camped out in front of the nearest store for hours before they even open, just to get something that is marginally better than the last widget that was released.

Do you think Apple© dumped a bunch of money into that advertising promotion, sending out ad after ad, building up a campaign over several months to get them to buy? NO! All they had to do is appeal to their 20% group with a simple message that, “Hey, it’s new, it’s shiny, it’s available, and it’s from Apple©,” and they come running. Heck, they probably could have sent a one shot email to get them to come running.

On the other hand, the remaining 80%, the ones who probably have other types of phones, those are the ones that Apple© has to put in a real effort to reach. Whether it’s trying to compare feature sets and benefits, to pricing, to range of colors and cases available, Apple© has to put in a lot more money and effort to reach that 80%.

So… Why am I going on and on about this? It’s simple. How much money are you throwing away by either sending an advertising message to your 20% that’s overkill, or not spending enough on the advertising to reach your 80%.

More importantly, are you losing money overall trying to reach that 80% only to bring in 20% of your revenue? If, instead, you focused on that 20%, who bring in the 80% of your revenue, the group most likely to purchase from you again, would you really be losing that 20%. The saving you’d get advertising to a smaller group along with the higher response to each individual advertisement might actually make up the loss in revenue from not advertising to the other 80%.

The only way to determine something like this is to put your numbers under a fine tooth comb and test what happens when you start shifting your advertising budget to lean more towards the 20% or 80% group and see how the numbers work out.

A simple 20% change in how you spend your advertising budget could add up to an 80% impact to your bottom line.

Tell me what you think. Do you think it’s better to advertise more to the 20% to save on advertising costs, or is it better to lean toward the 80% since they’re the ones that’ll be harder to sell? Tell me what you think in the comment section below.

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