In business there are plenty of levers you can pull which will affect your company’s bottom line. Often the trouble is figuring out which ones to focus your efforts on. For established companies in mature markets the answer is nearly always to focus on the margin between your cost per acquisition and your revenue per customer. This is because the number of new customers you can hope to acquire is relatively fixed.
However, for young companies in new markets looking to grow quickly it can be far more worthwhile to look at the length of your sales process and payment cycle. The reason these levers are so important is that the faster you can recoup your initial marketing spend, the faster you can reinvest it in marketing again. (This applies equally to companies competing in a brand new market as to companies looking to massively disrupt an existing market.)
How Fast Can You Recycle Your Marketing Budget?
Which company would you rather own?
In a market with a lot of potential customers the question of how quickly you can scale your business is largely dependent on how fast you can turn your marketing spend into revenue. Essentially, if you can use your marketing budget to acquire customers and convert those customers into cash, you can then reinvest this cash back into more marketing.
A company that has an initial marketing budget of €10k and can turn it into €15k in sales in one month is obviously going to grow much faster than one that takes two months to do the same, but how much of a difference could it make?
To answer this you need to look at these four factors.
- How much does it cost you to make a sale?
- How long is your sales cycle?
- What is your average revenue?
- How long is your payment cycle?
Worked Example
This example is massively simplified in order to solely examine the effect of speeding up your ability to recycle your marketing expenditure. In the example both companies have exactly the same business metrics with the exception that company B can recycle its marketing spend twice as fast as company A.
Company A:
- Cost of customer acquisition: €10
- Length of sales cycle: 1 month
- Average revenue per customer: €15
- Length of payment cycle: 1 month
With an initial investment into marketing of €10k this company can generate cash of €15k after two months. If it reinvests the whole €15k back into marketing it will have cash of €22.5k at the end of month four. After a year it will have just under €114k in cash.
Company B:
- Cost of customer acquisition: €10
- Length of sales cycle: 2 weeks
- Average revenue per customer: €15
- Length of payment cycle: 2 weeks
With an initial investment into marketing of €10k this company can generate cash of €15k after the first month. If it reinvests the whole €15k back into marketing it will have cash of €22.5k at the end of month two. After a year it will have nearly €1.3m in cash.
Conclusions
Halving the amount of time it takes to turn your marketing spend into cash can more than 10x your revenue over the course of one year. Another way to look at this is that the quicker you can recycle your marketing spend, the less capital you need.
In the example above, for company A to end the year with a similar amount of revenue as company B it would have to start with more than ten times the amount of capital.
By comparison, if company A looked to pull the pricing lever, it would need to be selling the same product as company B at nearly €25 instead of €15, i.e. triple the margin.
So, what can you do in your company that will help you speed up how quickly you can recycle your marketing spend?
- Tweak your business to get cash upfront for product instead of giving payment terms.
- Get payment terms on any marketing activities that you take
If you have any tips about how to speed up your sales or payment cycles, please let us know in the comments below.
Good point Caelen. Our sales cycle will affect us greatly as we will have a 45 day free trial period.
Just wondering for a more established company like yourselves, is there the equivalent of “invoice discounting” on marketing spend, which would enable you to get cash in advance to reinvest in marketing?
Possibly… a VERY good relationship with a bank who can see that your marketing spend ‘consistently’ returns sales with profit.
Hi Michael
In an effort to cut our payment cycle we no longer offer any form of terms at all. We get all of our cash upfront. In addition we also abandoned monthly payments. Although this was for a variety of reasons, it has the benefit of accelerating the business.