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Spending on Ads vs. Investing in Customers

Posted by: Today's Tip Contributor on June 10, 2011

Generally speaking, advertising is considered an investment, not an expense—but it still isn’t the best choice for most startup companies. Advertising will nearly always get you customers. To truly build your business, however, you need repeat customers. Loyal customers. People who will not only come back, but will also tell their friends about you. That’s why, in the early stages of your business, you should invest in your customers at every opportunity.

A lot of entrepreneurs focus on keeping expenses low. That’s important, sure. But don’t go crazy worrying about expenses. Instead, look at how you can encourage your customers to come back again and again. Don’t be afraid to sell an item at cost, or even below cost, to show you value repeat buyers. Consider this your "advertising investment." The object isn’t to protect your margin on these select items—it’s to create conditions that ensure your customer will come back.

Since you’re the owner of a new business, your goal should be to create turnover in your inventory. If products are moving, it means you’re able to reuse your startup capital again and again. It reduces your dependence on credit and raises the return on your money. Also, these funds will then be available when you need them to invest in your employees, in your customers, and in the future of your business.

Bottom line: In your early stages, spend your money on your customers instead of on advertising. You won’t make as much profit in the beginning, but you’ll be on the path to building a winner.

Ben Federman
Chief Executive Officer
New York

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