Why your sales budget may be flawed

How do you arrive at your sales budget? If you're like most small businesses, you estimate total sales, subtract fixed and variable costs, and grudgingly decide, based on whatever money is left, what you can afford to spend on advertising and sales.

We'll use me as an example. I'm a ghostwriter, but I also photograph weddings. To keep things simple, assume we spend $5,000 a year on sales, book 20 weddings a year, and that the average price of a wedding package is $4,000. That means:

-- Sales: $80,000

-- Sales cost per transaction: $250

-- Sales cost as a percentage of sales: 6.25 percent

Are we happy with those results? Let's start by calculating whether we generate a reasonable short-term return on our sales investment (The definition of reasonable is the minimum we're willing to make.)

We add all our fixed and variable costs (including cost of sales) and spread them across the 20 weddings. Say we want, at minimum, to net 20 percent on each wedding. If we do, we're content -- and we shouldn't spend more on sales, right?

Wrong. There's a lot more to it than that:

-- Couples often spend more than what they originally paid for a package, on average about $500 extra per wedding (additional albums, extra photographer time, additional photos, etc).

-- Family and friends typically order photos and albums after the wedding, on average about $600 per wedding.

-- Couples often contact us, sometimes years later, for family portraits, sessions with their children, etc.

-- About 70 percent of our bookings are the result of referrals from past clients.

What is the cost of sales for the items listed above?

Roughly speaking, zero. We already spent the money to land the client, so follow-on sales and referrals are, in effect, free. Adding just the post-wedding sales ($500 from couples and $600 from their families) bumps the average wedding sale to $5,100, reduces our cost of sales to 4.9 percent, and increases our overall profit margin.

Plus, each booking is the gift that keeps on giving, since over half the time we get new bookings through referrals, which further reduces our selling costs.

So what do we currently spend to acquire new customers? Contrary to the title of this article, almost nothing -- it entails some website expense and a little labor when potential clients call to inquire. We spent a lot in the early years to land clients. We spent more and targeted a reasonable profit level per wedding because we knew:

-- If we did a great job, clients would purchase additional albums and photos.

-- If we did a great job, clients would contact us in the future.

-- If we provided great service, clients would refer us to others, allowing us to eventually reduce customer-acquisition costs.

The same logic applies to your business. Very few customer relationships, regardless of the industry, are one-off, unrepeatable events. Say you run a restaurant. If a new customer tends to return at least twice, shouldn't you be willing to spend more to acquire that customer, since you'll spread their acquisition costs over two or more visits?

First determine the reasonable short-term return you are willing to accept. In some cases, "reasonable" can be as low as break-even; as long as the likelihood of future business is high, your initial costs will be offset by future revenues. Then focus on ways to expand your products and services -- and consistently deliver great service -- so you can further leverage the value of an acquired customer.

Above all, don't see customer-acquisition costs as simply a cost or line item. Analyze the big picture and view the cost of sales as an investment. If you can make more, spend more.