Maximizing the Return on Your Small Business Marketing Spend – George Deeb, Red Rocket Ventures

Investing in your business’ marketing is essential for growth, especially as a startup business. So how do you determine how much to spend and what can you do to maximize this return on your investment? To discuss this further, we caught up with George Deeb, Managing Partner of Red Rocket Ventures, and author of three entrepreneurial handbooks with over 300 lessons for startups and business owners.

Transcription:

Jim Fitzpatrick:
Hi, everyone. Jim Fitzpatrick. Thanks so much for joining us on another edition of the Atlanta Small Business Show. Our next guest is George Deeb, managing partner of Red Rocket Ventures and author of three entrepreneurial handbooks with over 300 lessons for startups and business owners. Thanks so much for joining us once again, George.

George Deeb:
Hey, Jim. Thrilled to be here again.

Jim Fitzpatrick:
Yeah. Our viewers get so much out of your visits here and the information that you provide. Of course, all of the tips that you’ve put together certainly makes you an expert in the area of small business. So thanks for joining us. So let’s talk about that. What is a marketing ROI?

George Deeb:
Yeah. Marketing ROI is talking about, what is your return on investment on your advertising budget? It’s typically calculated as your return on ad spend or ROAS is another way it’s referred to. That’s calculated is taking your total revenues of your company divided by your total advertising spent, and a good way to think about your return on ad spend is, if you’re going to shoot for a specific metric to guide yourself by, anything in the five to 10 times relationship is a really good multiplier on your marketing investment.

George Deeb:
Not all companies get that high. Some industries are very competitive, and you have have a lower number. Other industries are less competitive and have an even higher number. But if you’re in that five to 10 times range, you’re doing pretty well. But it does vary substantially by industry, and how it’s calculated for a B2C company versus a B2B company would be different.

Jim Fitzpatrick:
Sure. Some of the business owners that I speak with have a problem with attribution when it comes to marketing where they’ll say, “Yeah, we had a great month, or we had a great quarter or what have you. We spend X number of dollars in marketing, but we don’t really know which marketing segments worked. Was it our television spot? Was it our digital? Was it our social ads that we run?” It’s so difficult to track that in so many cases, and as you know, you can even ask a consumer that comes in, “Hey, what brought you in today?” And they’ll say, “Oh, I was just just driving by.”

Jim Fitzpatrick:
Then later on in the conversation, they’ll tell you how they went online and they looked for restaurants or they looked for furniture stores, or what have you, and you came up. Then you’re like, “Well, that’s far from just driving by.” You know what I mean? If you don’t delve down or drill down that far with your consumer, lots of times you just don’t know where they’re coming from. Do you have any solutions on how to get your hands around attribution–?

George Deeb:
That’s a great question, and it’s a very relevant one that most marketers struggle with. The news, is there are several tools out there that can help you with that. So you can build in attribution tracking into your… Many people use Google analytics as their analytics platform. There are attribution models that you can build into that tool so that you give partial credit to each channel that somebody touches the consumer.

George Deeb:
So what are they started from a digital advertisement, or they landed on your website, or they hit you from your email marketing list, or they hit you from your social media account, the analytics tool will know that and will give a partial credit to each sale to the various touchpoints that are coming in, obviously biasing the first touchpoint because that’s where they first came from.

Jim Fitzpatrick:
Sure. Sure. When do you know you have a problem with the return or as you call it ROAS? Is that what it is?

George Deeb:
Yeah. ROAS. Well, I think the simplest answer to that is if your gross profit does not cover the cost of your advertising, you typically have a big problem because you most likely you have many more expenses in your business than just your marketing costs. Let’s say your average product sale is $100 and you have a 50% gross profit on that. You’ve got $50 gross profit. You want to make sure your advertising is well below $50. Now, there are scenarios where maybe you it’s okay if you have a higher advertising cost, and I’m specifically thinking about products that have a very high frequency of purchase.

George Deeb:
Let’s say your Starbucks Coffee and you’re buying a cup of coffee a day, well that’s okay. So if you’re losing money on the first couple transactions, knowing you’re going to make the money back on transactions 10, 11, and 12, that’s perfectly fine to go in the hole in the short run, if you’re a high-frequency product. But most products don’t have that luxury.

Jim Fitzpatrick:
Sure. Sure. Even if you’re a furniture or maybe even a restaurant where it costs you a lot to get that customer in but if the food is good and the service is good, you know that they’re hooked, and now they’re coming back. Same with the furniture.

George Deeb:
That’s exactly the same. The longer the life of the product, the lower the frequency of the purchase. I’m familiar with the furniture business in one of my portfolio companies. That piece of furniture is going to sit there for 10 years. It’s going to be unchanged for the next 10 years. They’re not going to buy another table set. Once that set’s been purchased, you pretty much got out them. So you better have other products in your stable of offering to kind of upsell them over time, otherwise your marketing costs need to be low enough on first transaction to make it profitable out of the gate.

Jim Fitzpatrick:
That’s right. That’s right. I think a lot of small business owners, especially starting out, is they fall into that trap of listening to every single great pitch that walks in the door, calls, or sends them an email and says, “You got to do this. This is really going to drive more business in.” Of course, as small business owners and entrepreneurs, you’re so anxious to get business in that you have a tendency to believe every pitch, whether it be the TV person or the radio person or the social media company that calls you and says, “Hey, we can help you get your word out.” So talk to us a little bit about small business owners trying to stay away from that.

George Deeb:
Well, for sure. I mean, at the end of the day, most small business owners, many entrepreneurs, they’re first time entrepreneurs. They don’t have experience running a business, yet alon running a marketing department. So oftentimes you’re doing lots of learning on the fly, and you want to make sure you don’t make a lot of mistakes. So the way to get around that is to surround yourself by experts that know what they’re doing. If I’m doing a marketing campaign, I either want really smart digital marketers as part of my team that have done it for a living or an agency that knows what they’re doing and can point in the right direction.

Jim Fitzpatrick:
Right. Right. That’s one of those areas where some business owners feel like, “Well, can I really afford an ad agency? I mean, that sounds kind of lofty.” But at the end of the day, there are so many companies out there that do a good job and specialize in working in much smaller budgets, whether you have $1,000 or $2,000 or $3,000 to start off with, because every single one of those dollars means a lot to that small business owner.

Jim Fitzpatrick:
But to your point, I think, and it’s a good one, associate yourself with somebody that has been down this road before, because I fell into that trap myself a couple of times when you open up a business and everyone that walks in as an expert. Then they tell you, “Oh, the last person you just spoke to? They were wrong about that. What I’m selling is the right thing.” And now you’re really confused, right?

George Deeb:
You got to know the right questions to ask. Certain agencies, as an example, are designed for huge companies, and you’re never going to be able to afford their services. They’re going to pitch you all these fancy bells and whistles that you don’t have the budget for. Other agencies are niche targeting startups or early stage businesses, and they can work on a shoestring budget. They know how to turn pennies into manhole covers to use that expression, and they’re really good at it. Where the expertise can really help you is, the biggest mistake a lot of these entrepreneurs are making is they’re applying the wrong metric to the medium that that they’re marketing.

George Deeb:
For example, most entrepreneurs start with Google for search engine marketing as an example. Well, that’s a lower funnel tactic. Somebody going to the search engines typing in restaurant furniture, if I need restaurant furniture right, now should expect an immediate sale out of that advertising. But if you apply that to a television ad, a brand building ad, people may not be in the mood to be buying that furniture right now, and you shouldn’t be applying a lower funnel marketing metric to an upper funnel brand building tactic. So it’s using the right metric at each stage of the funnel to make sure you’re heading in the right direction.

Jim Fitzpatrick:
That’s right. I couldn’t agree more. Then there’s little things that you can do too with your marketing department or your marketing agency that doesn’t cost a boatload of money. One of them is something as simple as retargeting ads. If somebody comes to your website, and we’ve all seen them. Sometimes maybe you don’t know what they are, but you think, “Wow, I just went to this website, and they sell shoes. Now this shoe store has ads on every page that I visited.” Well, obviously they’re following you to whatever websites you go to, and their ads are coming up. Well, what’s cool is that Google only charges on those ads when a consumer clicks them.

Jim Fitzpatrick:
So it’s a pretty good spend, and it doesn’t take a boatload of money. You could spend $10 a day and set it up accordingly to say, “Well, I’m going to spend $300 a month. At $10 a day, as soon as my $10 runs out, then I’m done for the day.” But, but those ads can show up everywhere, and it’s just a constant reminder to that consumer, to one of your customers that came to your website, “Well, what about now? What about these shoes? What about those? What about these boots? Here’s our sale coming up this weekend?” And it’s a great way to get the word out to the people that are familiar with your product and service.

George Deeb:
No, for sure. I mean, retargeting really has two advantages. Advantage number one is to your own users, sometimes it takes six, seven, eight impressions of your business where something becomes actionable. So it’s helping you get those impressions out there and staying front of mind. Maybe the first time they were on your website they got distracted. They had to go deal with their kids’ homework, and they forgot about you. But this is a way to bring them back.

George Deeb:
Second advantage, and this is my favorite part of it. You don’t only have to retarget your own users. You can retarget your competitors users. So if there are websites where you think your customers are hanging out at your competitor’s website or some industry association website or some media website that targets your customers, well, you can set up your targeting to go after those users as well, and that’s really a terrific tool.

Jim Fitzpatrick:
Yeah. That is pretty cool. Would you agree that digital and social marketing should be really the foundation now before they branch out to anything else such as a buy on TV or radio or billboards or things like that?

George Deeb:
Yeah. For sure. I mean, for most startups, early-stage, small businesses, that’s the most affordable. We describe the paper performance aspects of those campaigns where you’re buying on a action, a click basis. So for sure Google and Microsoft and the other search engines or Facebook and LinkedIn and Twitter for your social media accounts, those are really terrific platforms to get started. The problem is everybody knows they’re a great place to get started.

George Deeb:
There’s such competition on those platforms to get discovered that if I’m putting on the hat of an e-commerce business, it’s very hard to make material money these days, because your cost to acquisition is in a perfectly competitive market where any potential profit on your product has been eaten up by the marketing budget because everybody knows what their margins are and what they can afford. So the long-term winners in the digital marketing world are Google and Amazon and Facebook. It’s hard for you to make a ton of money on it if you’re not astute at what you need to be doing.

Jim Fitzpatrick:
Yeah. Again, that’s a great reason once again, to align yourself with an expert out there that that knows this, does it every single day. Yes, you can do it yourself, but I wouldn’t recommend it. I think it’s very dangerous. One of the mistakes that when I talk to entrepreneurs and people that are starting businesses, and they’ll say, “Well, I’ve got the rent, and I’ve got the attorney’s fees. I’ve got my accountant, and I know my payroll’s going to be and my employees or what have you.” And you’ll say, “Well, how much have you set aside for marketing?” Sometimes you get a deer in the headlight.

Jim Fitzpatrick:
Well, I bought a sign. I’ve got a sign right over my store. People are going to see the sign and walk in, right? No, they’re not. But then you’ll say… One business owner that I spoke to said, “Oh, I set aside $5,000 for marketing, and that’s going to take me for a little over a month, I think, based on what we’re going to spend.” Don’t spend any other money in your business. Go put it back in the bank. If you’re not going to spend money in marketing for your business, and $5,000 for a one-time shot is not going to do it.

George Deeb:
Let me put an exclamation point behind that. As a venture capitalist, what an investor is looking for in a smart company, smart investment is, how are revenues accelerating, so how fast are they growing, which is obviously driven by sales and marketing. Two, what are your unit economics? What is the return on advertising, your ROAS, that you’re getting on your advertising spend, because the investor’s not going to give you money to experiment with.

George Deeb:
They’re going to give you money to pour kerosene on the fire. Unless you’ve got a winning model where you’ve got a profitable return on your marketing investment, your ability to raise capital as a company is going to be very, very hard to do. So marketing drives everything. When I’m building a budget, it always starts with the marketing budget because that’s where the revenues will follow.

Jim Fitzpatrick:
Yeah, for sure. One business owner I spoke to, George, and you’ll love this was, he said, “I was going to get a shop that is right out on Main Street there, and it was going to cost me a lot more per square foot to have that.” He said, “But nowadays, because of these, everybody types in the name of your business or what have you, and then, obviously, the directional will take you right to that business.”

Jim Fitzpatrick:
And he said, “I don’t see the need right now to spend that extra money on that because everybody’s finding me. If they really want my product, they’re going to find where my store is.” Would you agree with that statement? Is it okay now because of the technology to not be right there out on the main highway and pay top dollar for that?

George Deeb:
Yeah. There’s a couple answers to that question. Number one, the cost of being an offline retailer in this example is materially higher than being the cost of an online retailer. You have to pay for your rent. You’ve got to pay for your employees to staff the place. You’ve got to pay for a big boat of inventory, whatever it is. So being a digital business or an e-commerce business has materially more economic advantages than being a brick-and-mortar company. That’s my first answer.

George Deeb:
The second answer is, some businesses require brick and mortar. Maybe there’s something about the product that requires you to touch it and feel it and live it and get a brand experience. I mean, you use Apple as an example. Apple’s a smart company. They could be an e-commerce digital business only, but they made the business decision that they want to give their customers a real Apple experience with a unique store, with expert salespeople that know the product and can sell and live the product. That adds to their customer experience. So it all depends on where you are from a budgeting perspective and a brand goal.

Jim Fitzpatrick:
Sure. How much money should one set aside based on what their forecasts are for sales? How much should they set aside for marketing?

George Deeb:
Yeah, a couple of things. I mean, every business is different. A less competitive market, you put less money aside. A more competitive market, you got to put more money aside. A B2C business typically has a bigger marketing budget than a B2B company would because the B2B company’s typically driven with a sales team and not a marketing budget. So absent all those variations on a theme, I typically use a 10% to 30% of revenue range depending on where you are on those different inputs.

Jim Fitzpatrick:
As high as 30 though. Huh?

George Deeb:
Yeah. Well, if you’re an e-commerce business, you’re going to need to do that to block and tackle your way up against all the other competitors. If you’re in a land grab for a first mover advantage and some hot new product, and let’s pretend it’s the early innings of Uber and Lyft and some of these rideshare companies. Well, they were easily spending 30% of revenues to get that first mover advantage and build up mind share before any competitor could.

Jim Fitzpatrick:
Sure. Especially if you’ve got some very high margin product or service that allow you to do that. If you’re selling some kind of service or whether your accountant or what have you, to your point, you’ve got the availability to have that acquisition, that cost of acquisition of that client to be higher early on. If you say, “Well, it’s going to cost me $300 just to get a client to give me a call, but my average client spends $4,000 with me,” well, that’s okay.

George Deeb:
Yeah. For sure. For sure.

Jim Fitzpatrick:
There’s no question about it. Well, George Deeb, managing partner of Red Rocket Ventures. Thank you once again for visiting us here on the show. I know that our viewers and our subscribers get so much out of your visit here, so thank you so much.

George Deeb:
My pleasure, Jim. Good seeing you.

Jim Fitzpatrick:
You too.

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