One of the questions that I am often asked is what is the right amount to spend on Local Customer Engagement (LCE), which is the new digital-world terminology for what many of us have known for years as Local Store Marketing. Now, if I told you that “if you spend a million dollars on local marketing and you’ll reap two million in return” —I imagine you’d think the right answer to the question is a million dollars. While making more than your costs is the core concept of determining your spend, there’s a lot more to think about, when you’re deciding what your local budget will be.
Investing in Local Customer Engagement is a lot like investing in the stock market. Some things are sure-fire, immediate quick hits and others are long-term investments that will reap dividends year after year. The general rule of thumb is to spend between two and five percent of total gross sales on your local marketing efforts—but, even that concept can be questioned. In the end, it boils down to two elements: breakeven point and return-on-investment (ROI).
Reap What You Sow
The old adage, “You need to spend money to make money” is 100% true. I’ve had some clients say “my budget is $2,000—that’s what I’ve always spent and I want to stay within that budget.” Yet, they’ve hired me because their sales are not what they want. That’s where the second old adage comes in “if you continue to do things the way you’ve always done them, don’t expect different results”.
What you really want is the best solution to boost your sales and transactions. My experience in working with McDonald’s during the years they ran the Monopoly promotion is a great case in point. The cost of running this promotion at the local level, with game pieces and free food prizes being distributed to all customers, was quite high—-yet the success of this promotion and it’s ROI far outweighed the costs. Initially it was quite difficult to convince local franchisees to increase their spend for this program—but, once the terrific results were known, the program ran successfully for years. Imagine if the franchisees had decided that the program was just too expensive to run—because it was more than the budget they typically spent!
Start with a Baseline Budget
I agree that spending between two and five percent of total gross sales is a great starting point for your budget. If you spend too little, your marketing will fail…but, spend too much and your variable costs will throw off your overall net profit. This baseline budget will give you a target range to shoot for as you create your plan. I suggest breaking this budget up into a per week stipend and multiplying by the number of weeks your plan will cover. My preference in plan duration is six to eight weeks.
Calculate Your Breakeven Point
Now look at each tactic that you’ve identified for your plan. What are the external variable costs associated with the program (i.e. signage, coupons, digital ads, sponsorship, etc.) and what are your internal variable costs (i.e. supplies, labor, packaging). Total all the costs and this is your breakeven point. You’ll need to generate at least this much in incremental profit to cover your costs.
Incremental is an important word—covering your costs with the sales you are already bringing in without LSM, doesn’t help your bottom line one bit. It’s the new customers and newly generated sales that will boost your profit and you need to feel comfortable that they will at least cover your costs. Ask yourself the following questions:
- Do you feel that the tactic you’ve selected has the potential to generate the incremental sales and profit that you need to breakeven?
- Are you being realistic? Is this a stretch goal or something that you feel you can easily accomplish?
Base your responses on your past promotional history. For example, if you are running a mobile app offer for a Buy One Get One, that requires you to sell 25% more units to breakeven, have you previously seen a 25% jump in units with a Buy One Get One offer?
Breakeven is the first step in deciding if this tactic is for you. However, there are times when you will use an LSM tactic and simply breakeven—for example, if a competitor is opening across the street, it may be fine to “just breakeven”, if it means that you’ve thwarted their entry into your marketplace. Breakeven is an important guide for your program decisions, but it should not be the only guide.
Getting a Return is the Real Win
Next look at the potential ROI for the program. How do you figure this out? Let’s say you’ve calculated your breakeven point at 5% incremental units and similar past programs have generated 15% incremental units. Those additional dollars generated by the potential 10% incremental are all gravy. You’ve already covered your costs and you know that 15% is a realistic expectation. That’s a great return on investment. You’ll need to forecast what you think your reasonable incremental profit will be in order to calculate your potential ROI.
The tricky part of Local Customer Engagement ROI comes into play when you consider the “intangibles” that can’t be valued in dollars. Often it is these intangibles that will drive your business in the long-run. For example, let’s say that you offer a Buy One Get One offer and one of your regular customers comes in with a friend to redeem the offer. That friend loves your service and also becomes a regular customer. The value of that new customer far outweighs the base add-on sales that may or may not have been generated in the initial transaction.
LSM Programs that have no immediate impact on sales can often reap long-term dividends. For example, sponsoring the local Little League could garner a tremendous amount of loyalty by the players, families and friends. Offering a fundraiser for the local high school could boost your own sales, as well as allow the school to purchase new band uniforms—showing your support for your local community.
It’s all About Balance
At the end of the day, your decision about your Local Customer Engagement budget, has to balance all of these elements
- Potential Short-Term ROI
- Potential Long-Term ROI (intangibles such as new customers, loyalty, community support, etc.)
Review each of these elements for every tactic in your LCE plan and decide if the tactic is worth the investment.
Whether your budget is two percent or ten percent of total gross sales—if you’re getting balanced returns that are driving your business forward, you’ll be happy to make the investment. Percent of sales is really just a guideline for what is typical in the retail industry—but, it is by no means a hard and fast rule. Don’t be afraid to invest, especially if you find yourself in a new, highly competitive or down market. Carefully watch and chart your returns—just like you watch the stock market. Seize the opportunity to drive your sales through a strong Local Customer Engagement plan.
Interested in learning more about creating LSM plans? Check out Steps to Creating a Local Store Marketing Plan.