The fact (okay, my opinion) is a high percentage of marketing dollars are wasted.

You’re frustrated – you think your business is at big disadvantage because you don’t have the money to get the word out. It’s hard enough to scrape startup money together in the first place. It’s overwhelming to think about advertising cost on top of everything else.

I’m here to tell you that marketing a small business on a budget is the better way to grow revenue.

Big Ad Spending Seems Like the Holy Grail

I’ve got this friend. Every day a few dozen people buy his software for $60. He’s got a great business on his hands, but like all entrepreneurs he wants it to grow.

A few months back he said to me “There has to be a way for me to work with paid traffic. I’m going to spend the next month figuring out how to drive sales with Adwords.”

“Great idea,” I said, “I bet you’ll figure out how to really make it crank.”

This guy is no slouch. His customers love his product, and his website converts well. I didn’t see any reason he wouldn’t be able to make big revenue gains using paid traffic.

But…Advertising Can Be a Huge Money Pit

Within a day or two he was spending as much as $1500 per day on Adwords. If he kept it up he’d be spending $50,000 per month on advertising. Whoa.

But hey, if the ads generated proportional profits, then gravy right?

Problem is, there were no profits. After thirty days of testing he gave me the post mortem:

• Roughly $55,000 spent on Adwords.
• Around 600 new customers (resulting from the advertising).
• His cost per new customer was around $90.

But wait a minute. Didn’t I say that his product sold for $60? Yes I did. Which means he was losing about $30 on every ad-driven sale. Ouch.

Why did his big budget marketing experiment fail? The market loves his product, and he’s got thousands of customers that prove his website can make the sale.

I acknowledge that my friend isn’t an Adwords pro. If he were a savvier bid manager, he probably could have broken even on the experiment. But no business owner’s goal is to break even, is it?

So what went wrong?

I think it’s simple. Advertising-driven visitors are hard to convert, for a few reasons:

• Paid marketing is usually interruption marketing. You’re shoving an ad (TV, radio, newspaper, etc) in people’s faces that aren’t looking for your product, let alone your brand.
• Even when it’s not interruptive (as in the case of Adwords and other search marketing), your ads too often catch people in “shopping around” mode.
• They’re checking all the different kinds of widgets, comparing prices, looking at reviews, etc. They don’t feel any special affinity for you or your product, and clicking on your (costly) ad is just part of their research process.

Bottom line – paid marketing campaigns don’t involve people who know you. “Well, heck,” you might say, “If I knew enough people personally, I wouldn’t have pay for marketing, now would I?”

Your Customer Relationships are Your Best and Least Costly Marketing

That’s exactly my point. If you want the ultimate in low budget marketing ideas here it is:

Know tons of people, and have tons of people know you.

In other words…

Your relationships are the most potent, least costly marketing tool you could ever use.

The same friend’s business is a perfect example – he doesn’t need big paid marketing plans because he has massive amounts of free marketing from his customers.

This should illustrate the point:

Over the two year period from mid-2009 to mid-2011, my friend’s website actually decreased by about 5%.

His revenue increased by 150%.

Yup.

So how did he do THAT?

I’ll tell you.

He improved his conversion process. Think that’s not related to his marketing? Think again. Marketing is about maximizing the amount of traffic you get (whether you run your business online or offline) AND maximizing the revenue from that traffic.

So it was a costless marketing strategy for my friend when he:

• began offering a free full-feature seven day trial of his software.
• created an upgrade incentive for his buyers by letting them buy a copy of the software for a friend or family member for 33% of the retail price – if they bought it during their checkout process.
• made it much easier for his customers to refer friends and family (by automatically sending them personalized referral links with built-in coupons they could forward on to friends and family).

Those changes to his pricing packaging cost him nothing, but increased his number of sales and the value of each sale. THAT is a solid low budget marketing technique if I’ve ever heard of one.

Even before those referral initiatives he could trace about one in four sales to a customer referral. And one in four actually underestimates the word of mouth factor in his business – if one in four tell you they were referred, you know there were more who were referred but didn’t speak up when asked.

So that begs the question – how does he get such a high percentage of his customers to refer friends and family?

The obvious answer would be a strong product and great support (and he definitely has both).

The less obvious answer is that he’s spent six years establishing a strong culture around his brand:

• He has a free forum where his users support each other, answer each other’s questions, and generally cheer on his whole business.
• He gives away a ton of free educational material helping people understand how and why they should his product to the fullest. The better they see the vision of the product, the more value they get from it. The more value they get from it, the more likely they are to tell a friend to buy – and then teach the friend how to use the product!
• He does a weekly podcast to strengthen his current customers’ feelings about his product, and attract new customers.
• His business’s Facebook page has thousands of fans.

Every one of those techniques is a) costless, and b) extremely effective in retaining his current customers and attracting new ones.

Long story short, my friend built a business with seven-figure revenue, and nearly all of his marketing is free. Brilliant.