Should I Invest in Inventory or Marketing?

Many business owners ask “should I buy more inflatables or invest in marketing?”.

Buying an inflatable increases your capacity. Marketing increases demand, or more precisely, increases the frequency that the market demand will find and choose you.

The instinct is to buy more inflatables, because it can seem more tangible. But it’s important to understand that the answer is “it depends”.

The answer to “should I buy more inflatables or invest in marketing” comes down to your unique circumstance in your business, and this article will help you identify the right strategy for you.

The Right Question

Finding the right answer is hard to do if you’re not asking the right question.

In this case, the right question is how do I increase profit?”

Some business owners are only focused on profit. So, they’re already obsessing about the question how do I increase profit?”

Other business owners are more focused on providing a great product or service. But what many don’t realize is that profit is the measure of your ability to produce a great product or service, as well as the way that you can grow your operation to provide more of your great product or service.

Some business owners might say that their primary objective is growth, not short term profit. But what is growth if not the expansion of the capacity for profit.

So, let’s focus on the right question… how do I increase profit?”

Profit 101

First, let’s define a couple of key terms…

As you already know, profit is revenue minus expenses. Profit can be reinvested into the business, or paid out to owners and employees as the fruit of their hard work in creating the profit. Simple.

Margin is the percentage of revenue that ends up as profit. So, if your revenue is $100k, and your cost is $70k, then your margin is 30%.

So, knowing what profit and margin are, let’s come back to our question “how do I increase profit?”

Profit is increased in the following ways:

  1. Increase margin
  2. Increase transaction size
  3. Increase transactions

So the question becomes, how do we accomplish any one of those, if not all three?

The answer comes down to economics 101: supply and demand.

Supply in the case of the party rental business means the number of bookings you can support with inventory, staffing and equipment. We’ll also refer to it as capacity.

So, the answer to whether you should invest in more inventory or marketing comes down to your unique business’ supply and demand.

Here are a few situations you might find yourself in, and how to respond to each.

Scenario #1…

When You Can’t Keep Up With Demand (Demand > Supply)

There’s a simple answer here… raise your prices.

Even though raising prices will likely mean fewer bookings, for many businesses, the overall profit increases! Less work for more profit? That’s called leverage.

Check out the diagram below. You can see that profit (orange line) is maximized with strategy 3, where prices (blue line) are 40% higher than the lowballer (strategy 1).

This diagram and the information contained are based on representative assumptions and calculations (which will be shared with Partners Program members), and are provided for illustrative purposes ONLY.

pricing-stages

The numbers are best viewed as representing an average sized party rental business, its average unit price, and monthly customers and profit. The calculations include consideration for fixed costs, variable costs and depreciation.

But the point is not about the specific numbers.

The point is, if your business’ demand is matching or exceeding capacity, then chances are you have room to increase prices, which will likely result in tempering demand but increasing total profit – you’re raising prices without increasing cost.

Raise prices gradually, and eventually you’ll see fatter profits and less headaches.

Remember, the lowballer position tends to attract customers that can at times be hard to deal with. They expect royal treatment at rock-bottom prices and don’t care if you make profit or not.

So, raising prices will not only make you more money, but it will also place a barrier between your business and the unpleasable penny pincher.

Now the volume of bookings you are accustomed to may go down (like the grey line in the illustration above). But don’t worry – in many cases that’s what we want.

We want to make more money doing less work and with less stress! That puts us in the best position to grow and meet our business goals.

The reduced headaches and burden of earning more money for the same or less work is priceless.

Give your price increase some time and then review your numbers. If profit is up, then congratulations, your price increase worked. You can use the increased profit and extra time-on-hand to better manage your business in other places.

*** CAUTION *** What if I increase prices and both sales AND profit drop off?

Don’t panic, its reversible. It’s likely that you were already priced at or above strategy 3 in the illustration above. Lower your prices towards where they were and proceed to the next section in this article.

In this case, you were probably already priced right. Which is a good thing. Pat yourself on the back for not leaving money on the table, and knowing it!

Another solution to excess demand is to increase capacity. However, this is quite a bit trickier since it typically means adding inventory, staff and/or equipment. So, increasing capacity comes with a cost, which lowers margin, but is necessary to growth.

However, it’s invaluable to first find the pricing level where capacity is balanced with demand for your unique market so you have confidence that you’re maximizing your margin. Then, work on increasing capacity in areas of your business that you already know additional demand is available.

A word about strategy 4 – The point here is that selective businesses decide to give up some profits in the interest of keeping stress down and employee engagement high. They’re willing to take fewer clients than is possible for peak profit if that means that they’re serving the best clients and the best events. In addition, they may have additional revenue streams that aren’t reflected in this model.

Next, let’s discuss scenario #2…

When You’re Keeping Up With Demand (Demand = Supply)

This is where you want to be. You want to manage your business to be in balance between capacity and demand.

If you find yourself in this situation, you have a couple of options:

  1. Grow
  2. Cruise control

But I’ll warn you that in my experience, and the experience of most successful business owners I know, option number two indefinitely results in decline, so it’s not really an option at all.

So, the only real option is to grow.

The trick is growing while keeping capacity and demand in balance.

When you increase capacity, if you don’t also increase demand, you’ll end up with the same revenue for higher cost. The demand may shift from older inventory to newer inventory, which can be misleading, but the overall demand hasn’t grown, so your growth will stall.

I don’t want your growth to stall.

Which is why Inflatable Academy offers industry-leading marketing services to help you increase demand for your services.

Investing in marketing when you’re already in balance also puts you in a position of demand exceeding capacity growth, which means you can now raise prices (as we discussed in the prior section).

We’ll talk about how to leverage marketing to drive demand in just a moment.

But first, we’ll talk about scenario #3…

When Demand is Not Meeting Capacity (Demand < Supply)

This is the toughest place to be, but everyone goes through it at least once in their business.

There are a couple ways to address this situation:

1 – Pare down capacity

This isn’t a great option, because it means that you’re contracting your business to get back in balance. But it can be the right move long-term in some situations.

To do this, you need good data on which units aren’t contributing up to par on profit and aren’t critical to your short-to-mid term goals, and put them up for sale. You may even take a loss on the units, but what you’ll end up with is a leaner business, closer to being in balance, and ready to grow again.

2 –  Drive more demand

This option seems impossible sometimes, because it means investing in marketing when it seems like there’s nothing to invest. It feels like a catch-22 – you need cash flow to invest in marketing, but you need marketing to create the cash flow.

But with the effectiveness and affordability of Inflatable Academy’s services, you don’t have any excuse.

You can have a top-notch website for under $1k in 2-4 weeks with our Website-in-a-Box service.

You can drive significantly higher demand by improving your search rankings with our DIY SEO tool, which is included in the Partners Program, for only $47/mo.

You can instantly drive high-quality traffic to your website with our AdWords Formula service starting at only $100/mo (plus click fees).

This leads us to…

How to Increase Demand

Real quick, here are our recommendations with marketing:

Your website is the foundation.

If your website isn’t mobile responsive, get it fixed – now! Use Google’s mobile responsiveness test to make sure it sees your website as worthy to show to mobile visitors, which now represent more than half of internet browsing.

If your website doesn’t use Google-friendly URL structure and navigation, as well as SEO best practices optimized for search spiders, get it fixed – now! Comment below with your website’s URL if you’d like an assessment recommendations specifically for your website.

If your website isn’t visually stunning, based on today’s high standards, get it fixed – now! Do you want to earn the business of the best customers, and be seen by event clients as trustworthy? You need a website that conveys professionalism and credibility, while still being fun.

Know your conversion numbers – how many leads and customers do you get per 1000 website visitors? Manage your business and make improvements to that number over time. The Inflatable Academy Website-in-a-Box service has been shown to increase leads by 500%! If you want more leads, learn more here.

If your website meets the above requisites, the next thing to do is…

Drive high-quality traffic to your website

During the offseason, search engine optimization (SEO) gives you huge bang for the buck. Investing your time and/or money in SEO while your competitors wait for the season to start, puts you at a significant advantage.

As you can see below, rank #6-10 gets a combined 3.73% of the clicks for any given search. If you’re in one of those positions, and you reach #5, you’d enjoy seven times greater traffic for that keyword. Seven times the traffic translates into seven times the leads and customers. Do that for the majority of the industry’s best keywords in your market area, and you’ll be in a commanding position.

This means that getting to #5 for the most valuable keywords is a critical threshold for your website. Let alone getting to #3, #2, or #1!

ctr-by-organic-search-rank

Image (c) moz.com

And investing in SEO is a long-term strategy. The benefits are cumulative and lasting, unlike advertising (i.e. Facebook ads, AdWords, etc).

The point is…

If you’re not in the top five, your competitors are. Who’s getting the traffic, and the business?

We’ve seen huge gains in search rankings quickly using our SEO Hero service.

And now the Partners Program includes access to our proprietary DIY SEO tool, so you can improve rankings and increase traffic for only $47/mo!

During the season, our AdWords Formula service is a killer solution to get instant and high-quality traffic to your site. Plans start at only $100/mo! We manage accounts for dozens of party rental businesses throughout the country and internationally – we know how to get the most clicks for the lowest cost. And you’re able to target backyard parties, bigger events or both.

What Do You Think?

So, what do you think? What will you do differently? Comment below!

1 Comment

  • Rob Wright

    Reply Reply January 11, 2017

    Good article, Mike. Certainly agree with not going after the penny pincher customers. It is not worth it!

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