How Do You Value a Marketing Investment?
We meet plenty of asset managers who baulk at the idea of say a $50,000 marketing investment. And yet, they would think nothing of allocating that kind of spend to say office equipment or travel and expenses. It’s really not a big number; actually, it’s a very small number but it has the potential to buy so much…. especially when you look at it like this:
Based on $100m of assets, $50k of marketing spend is a mere 5% of annualized revenues (assuming a modest 1% Annual Management Charge and before any performance fees). Of course, if the AMC is 1.5%, or even 2%, and top performers are collecting carried interest / performance fees, this percentage shrinks to almost nothing, often less than 1%!......and this scenario is based on a relatively small $100m of AuM, viewed by many as fledgling fund and certainly sub-scale for a good many Institutional investors.
So how do funds take themselves from $100m to $200m, or $250m to $500m of AuM? Well, performance certainly helps but the real answer is effective marketing. To move from $100m of assets and $1m of base revenues, to $200m of assets and $2m of base revenues, can cost as little as $50,000, or 5% of the incremental increase, or 2.5% of the overall asset pool. If at the end of the day, sum of the marketing effort only saw an incremental increase in AuM of a mere $5m, then a $50,000 spend would have broken even at the end of 12 months.
Try and think of another business where marketing is usually such a small percentage of revenues…the multi-billion dollar valuation world of ‘online’ businesses, is massively marketing heavy and can account for most of the massive overhead.
Not addressing marketing is like driving without insurance. You don't pay for insurance after you have an accident. You pay for insurance in advance so that you are covered in the event you do have an accident. Similarly, initiating an effective marketing strategy is something you do upfront.
It can easily work out to be less than 2% of what you can make from it in a year… as an option premium, that’s pretty good odds eh?