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Knowing the value of each customer is important, because it will help you understand how much money you can or should be spending on marketing to acquire new customers. Churn is inevitable with any business. You do your best to retain your existing customers, but over time if you don’t attract new customers, whether through referrals or marketing your business, and profits will decline.
Marketing is also an important aspect of helping to grow your business. We already talked about using word of mouth, the phone, and email to help grow your business, and those are all marketing. And you’re spending your time and money to get those customers.
When it comes to your marketing budget you need to understand how much it costs you to acquire customers. Spending too much will mean that it will take a longer time, or a large order for you to profit from them. And you need to understand the value and return on investment from buying customers. Which can be difficult if you’re only focusing on the money going out and not connecting it back to the sales you do make.
Marketing is not about spending a ton of money. It’s actually spending the least amount of money with the highest return. But to figure out what works for you and your business you’re going to have to come up with a strategic plan and try a few things out.
First let’s take a look at some numbers to help you understand how much a customer might cost to acquire.
When you dedicated time to creating active word of mouth, think about all the things that cost you money: Your labor, samples, flyers, business cards, gas. It’s often best to look at these costs over the course of a month, as they may vary each time. Working with conservative numbers, let’s say you go out 2 hours each week. You want to pay yourself a reasonable wage at $20/hour, 20 x 8 hours = $160. Let’s say your gas costs for the month were $60. Samples cost $75. And all your other supplies cost $30. This means, in total you spent $325 on word of mouth marketing.
If during your month you were able to get 80 names, and half of them turned into prospects, you’ve spent $8.13 per lead (325/40). From those leads, only 10% become customers and made an order, each customer costs $81.25 to acquire (325/4). Let’s say you get $1,000 in sales for all 4 customers, once you subtract your $325 marketing costs, you’ve still come out ahead. Even once you subtract the cost of supplies, blanks, your labor, you are still likely to have a profit.
Coming back to the $81.25 that it costs you to acquire that customer, it’s not going to cost you that same amount every time they make an order. You may still need to make a little bit of investment, but it won’t cost anywhere near the same amount. Plus, if you’ve done all the calculations for the customer’s lifetime value, you may see that your $80 investment will be worth $2,000 (for example) over the next three years.
Over time, you should see that your cost to acquire customers decreases, as you get better at sales and talking to people. You may find ways to reach more people within your time constraints or you might get better at making those sales.
If you have a $200-300 marketing budget each month, there are other ways to reach customers, aside from word of mouth that you may want to try out.
Print ads can be in newspapers, magazines, or newsletters. The upside of print ads is they are able to, potentially, reach more people (depending on the readership). The downside is that they may be harder to track your return on investment (you don’t know how many people saw the ad, or if the customer came to you because of the ad). With a $300 budget you may be able to run the ad every Friday, and have the potential to be seen by a few hundred people.
Lead cost on print ads can be pretty high. For example, if you spent $300, and 5 potential customers reach out to you, that’s $60 per lead (compared to the $8.13 for word of mouth). However, because the potential customer reached out to you, the likelihood of them purchasing is higher – they’re in need of your embroidery or DTG services. Let’s say three of those potential customers make a purchase, averaging $250 each, your total sales are $750. Having spent $300 on marketing you can calculate that each sale cost you $100 in marketing. You can see that it’s not an excessive jump from the word of mouth at $81.25/person. If your sales techniques improve and you can get at least 4 customers for every month, you’ll see a decrease in the cost per sale.
What you want to consider before you sell yourself that print ads are the way to go is figure out your profit from those sales. If you’re profit is zero, or close to zero, take a look at your ad and see if there is anything you can improve of for the next run – where are you sending potential customers? Your website or to call you? What does your website look like? How is your customer experience when they phone? Perhaps also talking to the newspaper and discussing alternative options – running the ad on a different day, smaller ad size – these may reduce the cost of the ad and in return help you see if you still have potential customers calling you.
Trade shows and events have a lot of potential for leads, as long as you’re going to the right ones. With trade shows though, you may need to budget a little higher in terms of your expenses and each trade show will have different costs. The first cost you’re going to encounter is the table rental. Smaller trades shows may have a lower cost (great!) but have less people coming through, while big trade shows can have thousands of people, but tables cost more.
As an example, your table costs $400 and you use $300 to create product (to sell and for sample at the show), as sell as all your other supplies – flyers, business cards, etc.
Because there is a higher concentration of people, the more likely they’re going to stop and check out your table. Let’s say 200 people come by your table, and you’re able to get 100 names and contact information. Those 100 leads only cost you $7/each. If 20 of those people purchase a product right then at the event, the cost per customer is $35. Using an average sale of $45, you’ve made $900 in sales. Once you calculate all your expenses, including your $20/hour wage, you’ll break about even.
Breaking even might not seem like much, however you’ve still got 100 names. Twenty of those people are already your customers, and have the potential to buy from you again, and 80 are still leads you will want to follow up on after the event.
There are a variety of ways to do your marketing and advertising, we’ve only touched on three, there’s still Facebook (which we’ll talk more about in the future), you can run paid ads on Google and Bing, and so on. Sometimes it requires that you get a little creative and you’ll have to do some research into what goes on in your local community.
From there, it’s a little bit about trial and error. Take a look at what you can reasonably spend on marketing each month. Try something out, calculate the return on investment, make adjustments. Find out what works for you, so that you can start to reduce the cost per customer and start getting new customers every month. Always keeping in mind, that a customer is worth more than their initial purchase.
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