The REAL Cost of Cost

As business owners, we often focus on bringing down costs, to enjoy a fatter profit. I’m here to say that low cost can hurt.

I’m here to tell you that no matter what industry you’re in, this same principle of; ‘too much reduced costs can hurt business’, will undoubtedly be true at some level.

If you’ve marketed your business before, be it on Facebook on the radio, in your local newspaper or anywhere. You would have done the math on what every $10 you spent (for example) got you in return.

Would you agree that it’s safe to say that 99% of businesses in Australia and around the world aim to reduce the cost of advertising as much as possible?

I do not necessarily mean reduce how much they spend, but if you’re selling a product for $100 and it costs you $90 in marketing to sell your $100 product, you’re going to want to try and decrease that cost as much as possible. First to $80, then try and figure out a way to reduce it to $70 or $60.

Every dollar you save getting 1 sale of your product would usually mean more profit for you. Right?

But can this never ending goal of reducing your cost actually cost you more in the long run?

That’s what this post is all about.

To help me try and explain this principle as easily as possible, because I don’t think I always explain what’s in my head 100% clearly a lot of time..  To help me explain it I’m going to focus on just one example.
It’s an example that I think most people can relate to. Here it is:

Have you ever been on a website, and it says “for more info, enter your email address?”… yes?

This is of course a way for the website owner to add your email address to their list so they can hopefully one day sell you a product or their service, which there is nothing wrong with. I totally support that.

Every business should have something in place where they are able to ethically build a database of their potential customers, along with a database or list of their paying customers.

This is called an “email opt in”. You are opting, or “choosing” to enter your email in exchange for a free PDF guide on whatever, just for example.

You’ve also probably been on Facebook or Google, and you’ve clicked on an Advertisement and the first thing it said was; “enter your email address to get it” (whatever the Ad was about).

Now, here is an example to help explain this principle using an “email opt in” action as our example.
If you owned a Gardening Business, that taught people how to grow their own veggies at home, one proven avenue for you to go down would be to use this same tactic of growing your database.

Your advertisement might say “84 Year Old Man Reveals His Secret for 2x the Number of Delicious Tomatoes From 1 Plant”.

People who were interested in growing veggies would click on this add, and enter their email address to get the free info sheet on the Old Man’s Trick. Wouldn’t they? If they were interested in growing their own veggies – they are the only people you’d want anyway. Because your main businesses is helping people establish home gardens.

Using this example, you now have a little machine that grows your businesses database. Every time a interested person enters their email address to get that info sheet, you are growing your businesses database.
However, this costs you money upfront when you place an advertisement that offers the old man’s secret.
And you’re not trying to sell them something immediately so there is no expectation that you will get a return from this advertising spend right away.

You’re hoping that in 7 or 30 days time, you can email these people again and offer your Full Home Veggies Kit which is your main product you sell and you hope that some will buy it.

Hopefully if three people (example) out of every 100 buy the kit maybe then you will draw a profit from the investment of attracting the 100 email addresses.

Let’s imagine that when you run the advertisement to give away the Old Man’s Tomato Growing Trick in exchange for an interested persons email address, it costs you $3 in advertising costs to get one email address.
That is $300 in total, for 100 email addresses saved onto your database. 100 email addresses of people that you KNOW are AT LEAST interested in growing more tomatoes. So why is that important?

It’s important because you know they are more likely to be interested in the MAIN thing that you’re planning to sell them soon. Which is your ‘Grow Your Own Veggies Kit at Home’.

The giveaway that you gave them in exchange for their email address was of course a real thing. It was an  awesome giveaway.  When the 100 people who entered their email address to get it actually read it, they all thought “this is a great tick! I never thought of that before!”

If you spend $300 on Ads to get people’s email addresses and you DON’T deliver the goods… you’re in trouble. Why would someone trust you again, or buy from you again if you didn’t deliver first time around?
Ok,  we’re still going here with this example.. And the underlying lesson which is, when you try and reduce cost too much it can end up hurting you.

If you remember, it cost you $300 to get 100 email addresses.

And then a few days later.. You sent them 100 people all an email that said “I have this complete Grow Your Own Veggies at Home Kit.,you can buy it here”. After you send that email out, a few people actually BUY IT!
Cool, right!?

The money you made in sales totalled up to be $300.

So you spent $300 on ads, and you eventually made back $300 in sales a week later. Great right?

You’re now in break even territory (not a bad place to be for first time around).

Of course you can email the exact same group of people again next week and maybe make 1 more sale, which would put you at profit. But you guess that the more you email the same thing, the less sales you make.
So you realise that the best way for you to grow this business of yours is to reduce the amount it cost you to get 100 email addresses.

Because you know your process works. Your sales system works. You just need to reduce the cost from $3 per 1 email address. Down to $1.50 per email address. A 50% reduction will give you a very healthy profit margin every quick.

So it is time to tweak your ads, because they were the things that got you the email address at $3 a pop. You try some different pictures with your ads.. You adjust the wording with the ads. Now you start to see some different results.

One of the different images you tested was terrible! It has the opposite result and now every email address you got went up from $3 to $4.50, so you cancelled that Ad, remembering that the goal was always to reduce your cost per email address.

One of the OTHER images you tested was great. It reduced the cost per email address from $3, down to $2. This saved you about 33% in your advertising costs. You were hoping to find a way to get email addresses for $1.50 (a 50% reduction), but not matter you do you can’t seem to get there. Your 33% reduction is still good, and you can make more profits overall. But you still feel a little bit limited by this.

You need to reduce your advertising costs even more, to make more money.

And this is where things start to get dangerous for any business. The more you start to come up with new and different ideas to reduce costs. The less positive impact it can have for your business.

But you feel you’ve tried everything, you’ve tested 8 different images with varied results. You’ve re-written your Ad blurb 10 different ways to see what version would get you better and cheaper results… the winning combination you were able to find was the version that cost you $2 per email address.

But that is as good as you can seem to make it.

…you have a GREAT IDEA.
You think: “UH HUH! – I know how we can get more email addresses for every dollar that is spent in advertising”.

You say: “We can run a competition and giveaway a $100 Kmart Voucher to everyone who enters their email address! This will SURELY get more people to enter the email addresses. And therefore reduce our cost overall per email address!”

So you run out and test this idea..

You spend another $300 on advertising, that mentions both the Old Man’s Secret PLUS the Giveaway Offer of $100 to be Given to 1 Lucky Person.”

This Ad achieved your best results yet!

You spent $300 in ads, and you got 300 email addresses! That is $1 an email address, and far better than what you had targeted which was $1.50.

You’ve just reduced your cost by about 66% compared to the first time you promoted the 84 Year Old Man’s Secret to Growing More Tomatoes.

Now you’re extremely happy, because you have 300 email address this time around, compared to the 100 you had the first time.

SO NOW when you email all these people about your main product which is your Grow Your Own Veggies at Home Kit, you’re going to make so much more money! Because even based on 100 email addresses, you just about broke even.

Now you have 300 email addresses! You’re about to make some serious cash!

So you do everything the same. You wait a few days again, you copy the email you sent out the first time exactly… because you don’t want to change anything, because you know it sold you 3 kits last time.

You send the email out, ready to celebrate. You’re already doing the figures in your head.. WOW.. now that this is profitable.. I can just get 1000 emails a day… x that by 7 days a week and that’s THOUSANDS! In just one week! Multiply that by 30 days in a month and WOW! I’m buying a new car! Or I’m moving house into a more bigger, nicer house in the best suburb!

Right? Have you ever done this before? Of course I have back in the day. Counting my chickens before they hatched was a speciality of mine.

So you’ve sent the email. To the big new group you just got at your lowest price ever.

But what happens next shocks the life right out of you.

You sell NO Grow Your Veggies at Home Kits… NONE! You figure something must be wrong. You also sent the email to yourself as always so you go and check the email, it looks fine on your computer, you click on the BUY NOW link in your email and that website loads fine.

You can’t figure out what went wrong! You should have made almost a thousand dollars by now!
So you actually go ahead and buy your own product to see what’s not working. Because you’ve figured that something to do with the website must be broken.

You complete the entire purchase and everything works perfectly. You end up making one sale BUT IT’S YOUR TEST PURCHASE!

The entire process worked perfectly, you realise that now. But you still don’t know why in hell didn’t anyone else buy it! When you’ve made a few sales at least every other time you sent out your email !!

You curse the 300 new people, you curse the internet, and your computer of course.

You just can’t figure it out.

So maybe you go and do it all again. You spend another $300 using the same $100 gift card giveaway offer. You get another good result of 300 email addresses at $1 each..

You wait a couple of days but first you test everrrything before sending your email out. You send yourself the email first, you click on the BUY NOW button, you load the website, you make a test purchase on your iPhone as well as your laptop, because THIS TIME you wanted to test both!

Everything works fine. Everything is working perfect. Your web developer isn’t an idiot after all, he has everything working perfectly.

Ok so now, you wait for the perfect time. It’s 2:30pm on a Tuesday afternoon, you know already this is a good time to send emails. You proofread everything one last time, then you press SEND.

There they go… 300 emails fire out to everyone’s email inbox.

You can see your numbers change from ‘0 people opened the email’. To 4 people opened the email, to 12 people.. To 40 people all within a few minutes!

OK! People are getting and reading the email. That’s good.

But guess what happens, no one buys the kit. You make no sales. You wait another hour, Clicking the “refresh” button 44 times every 10 seconds. But no new sales come in.

And that’s it.

You give up. Something’s broken. You don’t know what it is, and you’re pretty much ready to give up on everything and focus on your next business idea.

I can tell you what the problem is.

And you might of also figured it out by now because of the name of this Podcast episode.
The problem is, you tried to reduce the cost too much. You succeeded in reducing the cost, but that caused another problem, a bigger problem.

You got more people to enter their email address because you offered a $100 gift card prize.

When the majority of people saw your Ad, they looked straight past the important part which was the 84 Year Old Man’s Secret to Growing 2x the Tomatoes from the Same Plant, and they were focused on their chance of winning that $100. Some of them probably don’t even like tomatoes!

Some live in apartments, and don’t even have space for a veggie garden.

They couldn’t care about growing 2x more tomatoes.. But hey, a chance to win $100 gift card, just by entering my email address..
..I’ll will give that a go!

The problem here is that you moved the advertisement away from the key focus of your main goal. You’re no longer attracting 100 people who are interested in tomato growing, you attracted 300 people who are MOSTLY interested in the $100 gift card.

So when you send them an email about your Grow Veggies kit, they’re not interested. They probably never were.

You may as well sent them an email asking if they want to buy some Michael Jordan shoes. No matter what you sent, doesn’t really matter. You incentivised these people to enter their email address the wrong way.
You were so focused on reducing the cost. That you ended up attracting a big group of people into your business who yes they responded to your ad, but no, they don’t want what you’re selling. They just liked your Ad!

This is just one example of how the goal of reducing costs, can end up costing you a lot more than you gained.
The same thing can be said about hiring staff. You offer a salary of 50,000 a year, and you’ll get a 50,000 a year employee. If you offer a 80,000 a year, will you get all that extra money back and more? If you hire the right person you should. But someone who is happy with a low salary, may in some cases, only be willing to give you a low salary effort. Not only that, they just don’t have the experience or skills of a 80,000 a year employee.

How much will this unskilled employee cost your business? In errors, mistakes, sick days, general slacking off, and of course, when they quit after 10 months because they weren’t really interested anyway to start with.

Low cost can be costly.

So to wrap up this episode of the Podcast I want to leave you with the message that reducing cost is a great and powerful thing, when done right.

Before you start aiming to reducing costs, first know what are the Key Rules that you won’t forget or break on your mission to reduce costs. And these are simple. Using the example we’ve just gone through, an important Key Rule would be:

  1. Only attract customers who are a good match for my main product.
  2. Only advertise to customers who live in their own home.
  3. Only advertise to people who are over 40 years of age (this is an example, assuming that people who are interested in growing their own veggies will more so be found in the above 40 age bracket).
  4. Continue to compare apples to apples, by focusing on the avenue which I know works and I have a baseline for. Which is getting email addresses of the target market and not going off course by offering a $100 voucher in the mix.

These are just 4 quick examples of Key Rules you could maintain when focusing on reducing costs. Because, if you break either of these rules, you’re no longer getting the same result. You’ve gone off course and it’s not a healthy comparison anymore, to your first advertising test.

If this all makes sense, and you get it and if you want to learn a bunch more stuff like this related to advertising on Facebook, just go over to this page here and claim a FREE copy of my book.

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