One of the biggest challenges for startup businesses is deciding how much to invest in marketing when you don’t have a lot of money coming in. Budget tools and rules of thumb which are used by established businesses just don’t work when you are starting out and see a steep growth sales curve in your future.
Just because you don’t know exactly when that first or second sale will come is no excuse to simply pull a number out of think air, cross your fingers and hope for the best. For brand new businesses without a sales history to use as a basis for future forecasting and budgeting a simple way to build that first marketing budget is to use a tactic called the “payout plan”.
Now you have a marketing budget which is not limited by your current sales. For startup companies with plans for rapid growth, marketing in often the missing link between where they are and where they want to be.
This is not revolutionary financing. Companies like Amazon and Monster.com employed this approach in their early days. Awareness was critical to their ability to grow, so long before they had adequate sales, they invested in television advertising. They spent at a level well above what a company of their size could afford. The plan succeeded and the sales came. It worked because they did figured out what they needed to do to grow and how marketing fit in to their overall plan.
This technique will not work for every start up. If awareness isn’t your biggest the issue this approach won’t grow your sales. Consider Pets.com. They thought they would be the next Amazon so they bought ads on the Super Bowl. But you might not have ever heard of Pets.com.
Why? Awareness wasn’t their major growth obstacle. When people learned about them they chose not to use the service. There were major holes in their business model, and no amount of advertising could fix that.
As you can see from the Pets.com example there is risk in this approach. Since you invest based on future sales, it will be several years before you figure out if you were right or wrong. If sales don’t come fast enough you may be out of money before you generate enough revenue. The Payout Plan is the right approach if:
If you are trying to fuel rapid growth, it definitely takes money to make money. Just make sure you are spending it on something worth growing.
And if you are looking for smart ways to spend your marketing funds the next step is to build a plan. If you need help, give us a call.
After spending too many years in Corporate America, Lorraine said goodbye to the bureaucracy, glass ceilings and bad coffee.
Today you can find her at Roundpeg, a digital agency in Carmel, Indiana, building smart marketing strategies for businesses who want to use internet marketing tools to grow. For more updates from Lorraine, follow her on Twitter: @lorraineball.