Are You Leaving Money on the Table? Why Small Businesses Need to Spend More on Marketing

As a data science consultant working with small businesses in Austin, I’ve noticed a recurring theme: many of you aren’t spending enough on marketing. I get it—budgets are tight, and marketing can feel like a gamble. But here’s the thing: if your marketing efforts are generating a strong return, you’re sitting on an opportunity to grow your business faster than you might realize. Let’s break this down and talk about why you should be pressing the “marketing button” more often.

The Simple Math of Marketing Spend

How do you figure out if you’re spending the right amount on marketing? There are complex methods, like following micro-economic theory and spending until your marginal revenue is equal to your marginal cost, but the most straightforward way is to compare the cost of acquiring a customer to the value that customer brings over their lifetime. Here’s how it works:

• Life Time Gross Profit (LTGP): This is the total gross profit you expect to earn from a customer over the entire time they do business with you. For example, if your gross margins are 40% and a customer spends $500 a year with you for 5 years, that’s $2,500 in revenue which is $1,000 in gross profit.

• Customer Acquisition Cost (CAC): This is how much you spend to get that customer. Divide your total marketing spend by the number of new customers you gained. If you spent $1,000 on marketing and got 20 new customers, your CAC is $50 per customer.

I'm using LTGP here to be explicit, but you will often see this called LTV. LTV sometimes means lifetime revenue, sometimes life time gross profit, and sometimes lifetime net profit depending on the context.

Now, compare those two numbers. If your LTGP is $1,000 and your CAC is $50, that’s a 20:1 ratio. Imagine I handed you a button that turns $50 into $1,000—you’d press it as many times as you could before I yanked it away! Yet, I’ve spoken with small business owners who have ratios this good (or better) and are still hesitating to invest more in marketing. If this sounds like you, it’s time to stop twiddling your thumbs and start pressing that button.

The Challenges of Getting the Numbers Right

Calculating LTGP isn’t always straightforward. You need to consider factors like how likely customers are to buy again, whether they’ll refer others, and even discount future cash flows (an important method people often neglect). On the CAC side, some marketing channels are easy to track—like online ads, where you can see exactly how much you spent and how many conversions you got. If you have a sales team, you know their salaries and how many deals they close. But what about a billboard, a local TV ad, or sponsoring an event? You know the cost, but attributing new customers to those efforts can be tricky.

What the Numbers Tell You

Once you have your LTGP and CAC, the decision to invest more in marketing should be clear. If your LTGP far exceeds your CAC (say, a 10:1 ratio or higher), you’re likely under-investing in marketing and missing out on growth. If the ratio is closer to 1:1 or lower, you’ve got work to do. You can either:

• Increase Marketing Efficiency: Find ways to lower your CAC by focusing on more effective channels or optimizing campaigns.

• Boost Customer Value: Increase LTGP by raising prices, encouraging customers to buy more or more frequently, or reducing churn so they stick around longer.

A good ratio is typically around 3:1, but it's ultimately dependent on what your business goals are.

Don’t Let a Low ROAS Fool You

When running ad campaigns, you might come across a metric called Return on Ad Spend (ROAS). It’s a great way to measure the immediate revenue generated from your ads relative to what you spent—like earning $5 for every $1 you put in, giving you a 5:1 ROAS. For one-time products or services, ROAS is often a solid indicator of performance, and it might closely match your Life Time Revenue times your gross margins to get your Life Time Gross Profit (LTGP) all divided by your CAC for that ad platform. But here’s where it can be misleading, especially for businesses with recurring services or products customers buy repeatedly.

ROAS typically only tracks revenue directly tied to the ad, like a purchase made right after clicking a link. If you’re an insurance broker, a subscription service, or an e-commerce business expecting repeat purchases, ROAS will drastically underestimate the true value of your advertising. It doesn’t account for future purchases, referrals, or the long-term loyalty of that customer. A gym might see a 2:1 ROAS from an ad campaign, but if that new member stays for years, their actual value could be 10 or 20 times higher than what the ad platform reports. So, don’t be discouraged by a low ROAS. It’s just one piece of the puzzle.

How Ein Insights Can Help

I know these numbers can be tricky to calculate, especially if your data is messy or you’re not sure how to attribute customers to certain marketing efforts. That’s where Ein Insights comes in. We specialize in helping businesses make sense of their data. We can:

• Build models to predict your LTGP more accurately, factoring in repeat purchases and referrals.

• Analyze hard-to-track marketing efforts (like billboards or event sponsorships) to estimate their impact.

• Identify ways to reduce churn or increase customer spending, boosting your LTGP.

• Provide clear, actionable insights so you can confidently decide where to invest your marketing dollars.

  
  

If you’re ready to stop leaving money on the table and start pressing that marketing button, reach out for a free 30-minute consultation. Let’s crunch the numbers together and unlock your business’s growth potential.