2009 February: Budget Crunch

2009 February: Budget CrunchThere’s an old rule of thumb that a marketing budget and rent should be 12 percent of total sales. The theory is that if you have low rent, say 5 percent of sales, you are in a less desirable location and need to advertise more to make up for it.

On the other hand, a rent factor in the 8-percent to 10-percent range usually means you have a high visibility location that allows you to advertise less. I can assure you, though, that is not always the case. You may have gotten into a lease at a higher rate than you should have. Maybe you’re paying a bit higher because of a low vacancy rate in your town — even for a “B” location.

So, does the 12 percent rent/ad budget rule make any sense? Not to me. I’m fi ne paying more for a better location, but why on Earth would I restrict my ability to make money by keeping the brakes on my ad budget? After all, advertising is the only expense you have that can generate more than you put in to it. The food in your walkin won’t multiply itself. Your work force doesn’t work any harder on payday. Your building doesn’t get any bigger even though your rent goes up. But, advertising has the power to move the masses and bring back three, four, fi ve and even ten dollars or more for every dollar spent.

Why wouldn’t you spend more to make more? I determine a budget based on the performance of my marketing and on how much money I want to make. Not as an add-on to my percentage of rent. To arrive at a budget, I begin by asking three questions:

1. What is your exact ticket average (fi gured over the last 30 days)? If you are still in the Stone Age with no POS, you’ll have to do some tedious math.
2. Exactly how many times per year does an average customer purchase from you? Now you can certainly fi gure this out on a couple of month’s worth of data.
3. What is your food cost?

For easy math, we’ll use these numbers: Average ticket $15 x 18 purchases per year = $270. Now, subtract 25 percent food cost and you’ve got $202.50. Government statistics reveal that 17 percent of all people move every year. So, roughly speaking, people stay in the same house or apartment for about fi ve years. So, $202.50 x 5 = $1,012.50.

Alright, now every time a new customer walks in the door you’re looking at a nice tidy stack of cash –– not just a $15 one-time transaction. The question is, what will you invest to acquire a $1,012.50 asset?

In theory you could spend hundreds of dollars per customer and still come out smelling like a rose. But I would scold you severely if your marketing were that feeble. The fi rst example shows Pizzeria “X” doing $100,000 a year with a $5,000 marketing budget and a $20,000 profi t. Double the marketing to $10,000 and sales inch up 25 percent to $125,000 — but profi ts climb 38 percent to $27,500. If you’ve got world class marketing and a bunch of daydreaming competitors, a 50-percent sales increase causes a profi t explosion of 100 percent, jumping take-home cash to $40,000. I’m not making this stuff up –– I’ve got a calculator right here. And keep in mind that sales in my own pizzeria surged by more than 1,000 percent, so a measly 50 percent jump isn’t even close to being out of the question.

Why don’t some pizzeria owners spend more on marketing? Because they perceive marketing as a necessary evil to be doled out only when sales fall off a cliff. After all, they’ve got a tank full of gas, a big screen TV and cable … life is good. It’s only when the banker comes knocking at the door that they begrudgingly spend a nickel or two to get the party started again.

Once you understand that it’s not what you spend but what that expense produces, you’ll leave the realm of the clueless behind and be able to make an intelligent decision instead of just guessing and throwing darts.

You know those book-of-the-month and CD clubs? They’ll send you eight books or CDs for a dollar? The advertising and production costs alone guarantee that they’ll lose money every time someone joins. But they’re no fools. What they’ve done is made a super generous offer to hook new members because they’ve tested and calculated the lifetime value of a customer. They already know that for every 100 new members they acquire, 35 percent will continue to buy six books or CDs per year for three years .

And those tacky “But wait – there’s more!” commercials on TV selling kitchen gadgets for $19.99? Again, they are making a terrifi c offer to gain the fi rst purchase … then they start using direct mail to sell you more kitchen thingamabobs. They are very shrewd and it all boils down to “customer lifetime value.”

Pizza is a wonderfully “re-consumptive” product. That’s why it’s critical to get more and more customers into your stable and away from competitors.

Look at your budget with this in mind … a big, fat SUV gets 12 miles to the gallon. A Toyota Prius gets 46 miles to the gallon. The Prius will take you to the same place at about a fourth of the cost. Good marketing will do the same.

The instant you understand that marketing is all about “buying” customers with enormous lifetime value, you will be empowered to take the brakes off your marketing budget and let your profi ts run.

My experience is that most pizzeria owners don’t spend enough, restricting their success as a result. So, fi gure out what a customer is worth to your business. Polish your marketing. Track your results. And then spend what it takes to get where you want to go. ?

Kamron Karington owned a highly successful independent pizzeria before becoming a consultant, speaker and author of The Black Book: Your Complete Guide to Creating Staggering Profi ts in Your Pizza Business. He is a monthly contributor to Pizza Today.