Phil Wright : Component Factory

Tuesday, June 28, 2005

microISV, Marketing - The 5 Rules

The Two Sides of a MicroISV

To be a successful microISV we need to achieve two things. First of all we need to be good at innovation. If we cannot come up with a great idea and write the code to make it happen then we do not have a product to sell.

Creating an average product in a crowded marketplace is not a great recipe for sales. So we need to innovate in some way. It doesn't have to be the next killer application like VisiCalc but it has to be a compelling solution to a problem that people have.

I think this half of the microISV equation comes quite easily to most developers. We love to write code and we always think we can do it better than anyone else. Plus we are always full of ideas of some cool product we would love to create. So usually the innovation side is where we get started.

The second half of success is marketing. That forgotten half that most of us don't even think about until the product is already fully written. This includes me, the first product I wrote had no marketing strategy for at least the first 18 months of being sold!

Learn, Learn, Learn

I was thinking about this issue a few weeks ago and wondering how to handle marketing for the components I will be creating over the coming months. Then it struck me that I should solve the problem in the same way I would a technical problem.

If I need a new skill, such as learning a computer language, then I go on a training course. Why should learning a new skill like marketing being any different? So that is exactly what I have organized. Today I went on the first day of a two day marketing course that has a particular focus on Internet marketing.

Rather than hog this information to myself I will post about the interesting points covered relevant to our situation. There is far too much detail to write up everything from the first day in one go, but we can start with the overview of the successful marketing process. (His claim, not mine!)

The Five Golden Rules

1. Purpose of your business
2. The three ways to grow your business
3. Create multiple pillars of marketing
4. Test and measure
5. Calculate your customers true value

Lets have a look in more details at each area in turn.

1. Purpose of your business

You probably think that the purpose of any business is to make money for the shareholders and especially so if your one of the shareholders yourself! But there is actually only one purpose that all really successful businesses have. Namely the desire to add value to the lives of their customers.

In fact not just a desire to add value but an absolute passion for it. You need to have the mindset of wanting to create incredible value for your customers and then the profits will take care of themselves.

2. The three ways to grow your business

There are only three ways to grow your business. You can increase the number of customers. You could increase the average spend from each customer and last of all you can increase the frequency that each customer buys from you.

In fact you should be trying to increase all three at the same time. If you can increase your number of customers by 10%, and the average spend of customers by 10% and finally the buying frequency by 10% then your overall revenue goes up by an impressive 33%. Each individual 10% increase does not seem impossible to achieve but it is the cumulative effect that can make a really big difference.

3. Create multiple pillars of marketing

Most businesses rely on just one or maybe two different pillars of marketing. They use just advertising or maybe just direct mail to achieve sales. Instead you should ensure that you deliberately create and use multiple marketing pillars.

So investigate advertising, direct mail, telephone sales, referrals, pay per click, email, PR and joint ventures. Have a deliberate policy of trying out new marketing methods on a regular basis to reach more potential customers.

4. Test and measure

The vast majority of advertising and indeed marketing is a waste of money. In order to avoid wasting money you have to ensure that you can test and measure every aspect of your marketing.

If you place an advert on a website, then ensure you can measure the number of visitors this brings to your site. Even more important, make sure you can measure the number of sales this generates. Everything from each advert to each email campaign must be measurable.

Only then can you decide if the cost justified the resultant sales, and it also allows comparisons. You try one advert with a particular headline and you make 5 sales from it. Next month you do exactly the same but with a different headline and see what sales that generates. This way you can refine and improve the effectiveness of your marketing and constantly try out new ideas to find what does and does not work.

5. Calculate your customers true value

This calculation is integral to helping with step 4. You need to work out how much each new customer is worth in revenue to your business. So for example, an average customer buys three products from you over a period of three years and that equates to $600 in revenue.

Using this figure you can calculate if a marketing approach is worthwhile. If an advert on a website generates 3 new customers then you know that the value to you (on average) is $600 per customer or $1800 overall. But if the cost of the advert itself was only $1000 then you know it is worth doing again and again.

This total value of a customer is important and not just the initial revenue they create. Your new customer might only make a single purchase in the first month and so only be worth an initial $200 to you. Multiply that by 3 new customers and it looks like your $1000 advert is only returning $600 in revenue. But from analysis of your customer buying patterns you know that over the full three years that the average customers stays with you it will actually pay off.

Without knowing the true value of your average customer you cannot make intelligent decisions about what will and will not pay for itself in terms of your marketing spend.

Summary

This is really just a simple overview and does not provide the interesting stories and case studies that were the real heart of the presentation today. For me the really interesting points were 2, 4 and 5.

Make sure you can measure, or at least roughly estimate, the value of each new customer. From that you can carefully test new marketing ideas and measure the effectiveness. Try each new idea on small scale and only when you know it is working do you then scale it up to achieve the big effect.

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