Are you a Capitalist or a Gambler?

One of the basic principles of our economic system is that capital flows towards the most deserving hands, normally the opportunity for the best return for the lowest risk. So the entrepreneur, as business owner, acts as a magnet for capital attracting wealth to his business, whether from investors in exchange for a promise of a high return, from lenders looking for a low risk return or customers in exchange for goods or services whose value is perceived to be more than the price paid for them.

We might not all agree with this system, but in the post-communist era we all understand the way it works at a macro level and play along with it to a greater or lesser degree. We participate in person every time we go to the supermarket, we hold our most successful entrepreneurs in high esteem and we love to watch it happen live on Dragons Den.

Why is it, then, that when it comes to marketing, so many businesses choose to play at gambling instead of efficient capital allocation? Businesses all over the world are losing money every day because they fail to measure what they do and end up wasting resources that could be put to better use elsewhere.

Marketing can be very expensive. It costs six or seven times more to find new customers for your business than it does to sell to your existing customers and if you blindly spend money on marketing without understanding the return you’re getting you’re almost certainly destroying profits.

Understanding how much you’re spending on marketing and what return you’re getting on that investment is one of the keys to healthy, profitable business. The only way to do this is to track your numbers by measuring the amount you’re spending on each initiative, the amount of new business it’s bringing in, how much profit that is creating for you and how much your customers are worth to you over their lifetime.

One of the great attractions of web marketing is that Google Analytics will generate some of these numbers for you. But unless you understand your profit per sale and your customer lifetime value you’re only getting half the picture. Google can’t do that bit because those numbers are internal.

The good news is that when you start operating your business in this way, marketing becomes an investment rather than expense. So the amount you can afford to spend on marketing is limited only by the working capital you have available. And even better, your business begins to operate in a predictable fashion. So you have less stress at work, less worry when you go home and can sleep easily at night.

Or would you rather the thrill of being a Gambler?