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Growth Capex vs. Maintenance Capex vs. Internally Financed Capex

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Capital Expenditures

Growth Capex vs. Maintenance Capex vs. Internally Financed Capex

There are generally two reasons companies spend money on capital expenditures “capex”: to grow the business, and to maintain the business.  Once a company determines it needs to make a capex investment it must decide how to pay for the capex, either using company cash or debt.  Let’s explore each element of capex in more detail to get a better understanding:

  • Maintenance Capex: The necessary expenditures required to keep existing operations running smoothly.  Perhaps a new conveyor belt for the old machine, or new computers to replace the outdated technology.  These expenses don’t attract new customers or create the capacity for a bigger business; they just enable the company to keep running at status quo.
  • Growth Capex: The discretionary investments used to attract new customers or create the capacity for a bigger business.  Perhaps a new customer requires you upgrade your software before signing a contract, or maybe you need another machine to process all the upcoming orders from new customers.  These are the expenses/investments in additional assets to help facilitate growth.
  • Internally Financed Capital Expenditures: Spending internal cash (instead of debt) to pay for capex.  When banks are determining your credit-worthiness, they are evaluating all the sources & uses of cash.  Capital Expenditures (capex) is a big use (drain) of cash for many companies, particularly manufacturers.  The more cash is spent on capex, especially growth capex, the fewer funds are available for debt payments.  Capex financed with external cash (bank debt or owner equity) doesn’t reduce company’s cash flow, but capex financed with company cash does.  Internally Financed Capex is part of the FCCR, the ratio used to determine a company’s ability to repay its debt.  The bank often asks for an estimate of internally financed capex because that number won’t be included in any financial statement, but is necessary to calculate your company’s ability to repay debt!

If you have capital expenditures, it’s helpful to keep track of how much was spent to grow versus maintain your business, and how much was financed with company cash instead of bank debt!

-Brandon Hinkle/www.plurafinancial.com

Commercial Real Estate Cap Rates and Valuation

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Anyone new to the commercial real estate valuation game is probably beginning to hear words such as “cap rate”, “rent roll”, and “NOI” used often in the marketplace.  The goal of this article is to help you decode this kind of language in order to determine how to value investment commercial real estate.

Whereas the acquisition of a business is primarily valued based upon an EBITDA multiple, Investment Real Estate (e.g. apartment buildings) is generally valued based upon using a capitalization rate “Cap Rate”.  A detailed explanation of the EBITDA multiple and how to value a business can be found here.  But this article will solely focus on explaining the methodology and rationale of using a Cap Rate to value commercial property.

To value commercial real estate using a Cap Rate, there are three primary steps (below).  To simplify explanations, we will assume the real estate property is an apartment building.

1)    Determine Income

A Rent Roll is a spreadsheet/report that provides unit-by-unit detail of a property that helps investors calculate the Gross Potential Rent (best case scenario) for a given property.

  •  Gross Potential Rent is derived from the Rent Roll and is the maximum annual income at full occupancy and current market rent. This is one’s starting point to which adjustments have to be made such as loss-to-lease, vacancy, non-revenue units, bad debt expense, and concessions must be deducted from. In order to calculate the income one must consider, among other deductions/increases, the following adjustments:
  1. Loss-to-lease: If you have a Rent Roll as of today, and you have leases that were signed several months ago, those lease actual rates (in a rising rent environment) are probably below “market”.  Loss-to-lease totals the amount of this deduction for all units for their respective remaining lease terms. Note, should the property be experiencing a gain-to-lease (in a falling rental environment), this will be a positive number.
  2. Vacancy: This is a standard deduction that accounts for any vacant units.  If the market rent on an apartment unit was $1,000 per month and the unit remained vacant all year, then the vacancy expense would be ($12,000) for this unit.  Vacancy is the sum of all vacant units over the period analyzed.
  3. Non-Revenue Units:  This is the deduction for any units that no rental income will be collected on.  For example, if an apartment building has two model units and allows one leasing agent to live in the building for free, then there will be a total of three non-revenue units.  If the market rent on them is $1,000 per month then for the year the Non-Revenue expense would be $36,000.
  4. Bad Debt Expense:  Bad debt accounts for any uncollected billings that are deemed uncollectible.
  5. Concession Expense:  Concessions account for financial incentives provided to tenants to sign leases.  For example, an apartment building may run a special for new tenants that sign a 12-month lease to get the first month free.  Assuming that the apartment could be rented for $1,000 per month, then the total concession for this unit over a 12-month period would be $1,000.
  • Other Income:  Most properties have several streams of additional income.  It is important to add these additional streams.  Some examples could be garage space rental income, antenna income, pet fee income, utility reimbursement income, late fee income, etc.

The grand total after each of the above sources of income and deductions to market rent is commonly referred to as the Effective Gross Income.

2)    Calculating Net Operating Income “NOI”

  1. Think of this as your annual net profit from the property
  2. NOI Calculation: (Effective Gross income – Expenses”).

                                            Expenses are generally grouped into the following buckets:

  • Payroll: Accounts for all payments to employees at the property
  • Marketing: Expense for all efforts to attract and retain renters at the property.  This may contain items such as locator fees where third party agents are paid a lump sum in exchange for bringing a signed lease to the property.
  • Contract Services: Accounts for all payments for recurring services to the property such as landscaping, security, trash removal, snow removal, etc.
  • Repairs & Maintenance: Expense for all ongoing repairs that are made at the property.  However, this does not include large capital items life roof replacements that may be amortized over time.
  • Turnover: The expense related to apartment units switching tenants which includes items such as carpet replacement, painting expense, etc.
  • SG&A: Expenses typically include administrative expenses like supplies and miscellaneous items that don’t fall under the other buckets.
  • Management Fee:  This is generally tied to the rental income that the property makes and is the fee paid to the third party management company (if applicable).
  • Utilities:  This is the expense related to electric, gas, heating, water, HVAC, etc.  This may or may not be charged back to the individual tenants depending upon whether a RUBS (Resident Utility Billing System) is in place.
  • Insurance:  Property insurance on the building
  • Real Estate Taxes: Taxes on the building

NOI:  After each of the above expenses is deducted from the Effective Gross Income, one can determine the NOI.  However, some asset classes like apartments will also deduct a Capital Reserve after the NOI before applying the cap rate.  Capital Reserve is, for lack of a better description, a cushion that banks/investors assume must be maintained for each unit in case there’s prolonged vacancy, repair needs, etc.  (e.g. for apartments, the capital reserve is generally $250-$300 per unit, depending upon the age of the building.)

3)    Identifying Market Cap Rates for comparable properties

  • The best way to determine the value of anything is to find out what a similar item recently sold for…a comparable (“comp”) property.
  • Cap Rates are generally calculated by dividing a property’s NOI (from the year it was sold) by its sale price.
  • Cap rates are one of the primary metrics banks use to find the market value of investment commercial real estate; if a similar building down the street was sold for a 7% Cap Rate, your building might be given the same Cap Rate to create a fair starting point for valuation purposes.  Cap rates should really only be used on stabilized assets, meaning the properties have achieved the maximum expected on-going occupancy level.  Note, 100% is rarely considered stabilized since tenants will create natural vacancy when they move in and out.
  • Market Cap Rates can be found in online resources such as costar.com and realcapitalanalytics.com (just to name two, neither of which we are associated with).
  • Wick Kirby from HFF LP cautions that tax implications can have a significant impact on a sale process: “In most cases if a property has been held by the same investor for 20 years, there will be a much larger tax “pop” than if the property was held for just 3 years.  Therefore, it’s sometimes necessary to look at a Cap Rate with the current taxes as well as what the cap rate would be with the post-sale taxes (post tax pop and therefore lower NOI).”
  • According to Rob Stanek from The John Buck Company, “Once you’ve found a Cap Rate for properties that most closely match your property type/location, plug that Cap Rate into the following calculation: ($NOI / Cap Rate%).  This is the estimated market value of your property.  Cap Rates generally range from 5% to 10% depending on the size, occupancy rate, location, and characteristics of the rent roll at each property.”

Let’s use an example to illustrate the calculation for a 3 unit building:

4) Valuation:  Since the property was previously sold at a 10% cap rate, has meaningful vacancy, and is most similar to Comp 1 that had a 10% cap rate, we’ll assume the buyer will also assume a 10% cap rate.  With an NOI after capital reserves of $79,100 and a 10% cap rate, the property will likely be sold for at least $791,000 ($79.1k NOI / 10% cap rate).  When a buyer sees that they might be able to increase rents to market rate, they may be willing to pay a higher sale price, especially in a competitive market.

You may have noticed there’s one key difference between the EBITDA Multiple method used to value a business, versus the Cap Rate method used to value investment real estate; the multiple is a factor multiplied by your operating income…the Cap Rate method, however, divides operating income by a factor.  In essence, the EBITDA multiple assumes value is based upon the cash the company will generate in the next 5-7 years (a 5x-7x multiple).  By dividing cash flow by a factor, the Cap Rate method assumes the property will generate the current operating income in “perpetuity” (forever).  As a result, the Cap Rate is a much more aggressive methodology to value an asset, which is great for the seller!  Buyers, be sure to always ask about the Cap Rate assumptions before buying any property to ensure you’re paying a market price.

Special thanks to Wick Kirby from HFF and Rob Stanek from John Buck Company for their thoughtful contributions to this article.

~Brandon Hinkle/www.plurafinancial.com

Written by entrabanker

August 2, 2012 at 4:25 pm

Posted in Uncategorized

SBA Loan Statistics for 7A and 504 Loans, through 6/8/2012

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From the blog of pluraFinancial.com, here are the latest SBA loan statistics for SBA 504 and 7A loan approvals, through 6/8/2012:
  • Summary: The 2012 SBA loan trend continues…
    • On a Year-to-Date basis, SBA 7A Loan approvals are down 34% through 6/8/2012 according to sba.gov
      • The 7A Loan’s higher SBA guarantee fees and lower amortization relative to the SBA 504 Loan is attributed to part of the decline in 7A Loans as demand shifts toward 504 Loans.
      • Existing businesses and rural businesses in particular appear to be fleeing SBA 7A loans.
    • SBA 504 Loan approvals are up 27% YOY
      • Borrowers appear to prefer the ability to refinance existing debt, and the relatively low rates & fees associated with SBA 504 Loans
  • A closer look into the numbers: On a YTD basis, total SBA loan approvals were down $4.1 Billion, or 23% YOY
    • SBA 7A Loan approvals were down $4.9B YOY, or 34%, responsible for 100% of the YOY total SBA loan decline
      • 7A Loan approvals to existing business were down $4.1B
        • Loans to Rural businesses were down $1.8 B
        • Loans to Asian-American owned businesses were down $0.9B
        • PLP loans represent ~half of all 7A loans, and were down 57% YOY
      • 7A Loan approvals to startups were down $0.8B
        • Express loans, a popular SBA loan product for startups, were down $0.7B YOY
      • 7A Loans represented 82% of SBA Loans last June, and currently represent 71%.
    • SBA 504 Loan approvals were up $0.8B, or 27% YOY
      • Loans to Existing businesses were responsible for ~90% of the 504 Loan growth.
      • Approvals were up in nearly every SBA 504 loan category (minorities, existing businesses, startups, rural businesses, etc.)
  • Projections: We expect a continued shift toward SBA 504 loans in 2012 given the favorable rates and amortization relative to other SBA loan products.  This assumes the SBA will continue to permit 504 loan proceeds to refinance existing debt.  
-James Timberview/www.plurafinancial.com

Written by entrabanker

June 21, 2012 at 4:43 pm

How Being a Tourist in Rome is Like Creating a Startup

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-Brandon Hinkle/plurafinancial.com

I’m currently nestled uncomfortably in the middle seat of an American Airlines flight, returning home to Chicago from Rome, Italy.  Reflecting upon my trip, and desperately trying to block out the screaming baby two seats away from me, I started to realize how many parallels there are between creating a startup and being a tourist in Rome.  Sounds strange, I know. But hear me out:

  • No fear.  Don’t be afraid of unfamiliar territory; it’s better to be lost somewhere beautiful than bored somewhere safe.
  • No regrets.  Even if you’re tired and want to go to bed, you won’t get this time back so grab another cappuccino and keep exploring.  At the end of the journey you’ll never wish you would’ve rested/slept more.
  • Reflect.  Take a moment to realize how lucky you are to be doing what most people only dream about.  Trying to visit five cities in seven days can be exhausting.  Pulling all nighters on a startup that produces more expenses than revenue can be frustrating.  But take the time to reflect about how lucky you are to be in the moment most people only experience in dreams.
  • Be an ambassador.  Create relationships with the locals and fellow journeymen; you never know when your paths will cross again, and you can never have too many allies worldwide.
  • Be in good company.  Surround yourself with people that make good decisions and share your same passion for adventure; avoid moody, emotionally inconsistent people that have a history of making bad decisions and crack amidst uncertainty.  In foreign countries, an unruly travel companion can increase the anti-American sentiment and ruin the atmosphere of the journey.  In startups, volatile personalities will create tension and ruin the culture you’re trying to create in your business.
  • Don’t run out of cash.
  • Talent can be more valuable than experience. It’s common knowledge that Michelangelo painted the ceiling of the Sistine Chapel, which was painted in a style known as fresco – a painstaking process that uses dry paint powder & wet plaster and requires decades of experience to perfect.  But it’s not widely known that it was the very first time Michelangelo ever tried to fresco.  Think about that for a moment.  The Pope picked Michelangelo, at the time a relatively unknown, over Rafael (a very well known painter and fresco-ist) because the Pope recognized Michelangelo’s talent. The Pope took a risk that was clearly exceeded by the reward.  Similarly, many successful entrepreneurs I know took “risks” on people that lacked experience but had extraordinary talent.  Anyone put in a position long enough will have experience, but you cannot teach someone to have talent.  Find talent and hold onto it.
  • Put yourself in your customers’ shoes.   In sharp contrast to impressionist painters, whose seemingly sloppy work is best appreciated from afar, Michelangelo was notoriously detailed in his work.  The Sistine Chapel was painted in two phases/halves and the first phase was vintage Michelangelo…the figures in the paintings included subtle facial hair, the clothes had frayed strands of cloth and other detail that could only be seen up close.  When Michelangelo first viewed his work from the ground level, he noticed something interesting; his painting was too detailed.  The characters were perfect, drawn to scale and mirrored the human figure in every detail.  But he realized many of the characters looked too small from afar and that nobody would ever be close enough to the ceiling to appreciate that kind of detail. So the second half/phase of the ceiling included figures much larger and less detailed as the first phase.  The most popular and photographed sections of his work (e.g. God touching Adam’s finger) was from this second phase.  Michelangelo had the talent to create photographic-like detail, but the wisdom to recognize that wasn’t necessary for this particular work.  He could get twice as much done in half the time without losing value.  Be cognizant of your customers’ perspective and use your time efficiently.  If you realize the target audience could benefit from a simpler design, have the flexibility to change the product.
  • Have a tour guide. After getting stung with various “tourist taxes” (typically prefaced by, “ah…for you, American, very special price…”) we finally agreed to pay for a tour guide for the second half of our trip.  The tour guide’s years of experience and credibility among the locals proved to be invaluable for us as we worked to maximize our time in Rome.  Likewise, credible advisors are invaluable for every startup.  They’ve worked with others who have made many mistakes and will help you avoid similar pitfalls.
  • Be decisive, or get hit by a bus.  Walking around in Rome, there are virtually no street lights or traffic guides; to cross the street you must move quickly and decisively to avoid getting hit by cars, busses, and scooters.  You’d have to visit Rome to truly understand this dynamic, but believe me; hesitating halfway across the road could be fatal.  The most successful entrepreneurs I know are extremely decisive.  Even if not always the optimal path, strong entrepreneurs pick a path and go for it.  They may get a few car horns, but they always manage to get across quickly, leaving the rest of the fear-stricken pack behind.
  • Have a niche.  There is a large gathering area in Rome known as Piazza Navona.  It’s a bit like an incubator facility on the inside, filled with dozens of budding artists and entrepreneurs trying to sell their goods & services to the public.  One particular entertainer, a guitarist, caught my attention. As we sat near him, it became apparent that the guitarist only knew four songs.  But he knew those songs well and that’s all he needed, as passersby rarely stayed longer than a few minutes, just enough to give him a tip for the good experience.  His guitar box was full of cash within just an hour.  Too many startups, ours included, can be accused of offering too many services, instead of focusing on the few things that customers value the most.

Of all the sights I saw, one image stands out more than any other: the Roman Coliseum.  Standing inside the coliseum as the sun poured through arcs in the east wall, imagining the chariot races & gladiator battles that took place nearly 2,000 years ago is…indescribable.  Awe struck by the scale of what they built, with the limited tools & resources available to them when it was done.  I am 100% certain that nobody will remember the name plura Financial in the year 4012.  I’d be happy with 2022.  But the journey through Rome, the coliseum in particular, made me proud to be a part of a team trying to create something special.

Visit Rome, it’s a life experience.

(And yes, the baby is still crying…)

Written by entrabanker

April 30, 2012 at 4:54 am

The Benefits of Adding an Executive Coach to Your Team

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-Karen Orlich/www.plurafinancial.com

Do you feel distracted from reaching your goals?  Not sure how to develop an actionable plan and/or do not have time to assess the results of current performance to make improvements?  If so, executive coaching may be a good option to help you become better focused and excel in the future.

According to The Center for Creative Leadership (CCL®), a global provider of executive education, ‘executive coaching’ is defined as “a formal engagement in which a qualified coach works with an organizational leader in a series of dynamic, confidential sessions designed to establish and achieve clear goals that will result in improved managerial performance.”

The relationship between an executive and a coach is a collaborative one with the coach not only focusing on improving performance through overall skill assessment but also evaluating organizational position (i.e. examining the client’s role within the organization), assisting on execution of tasks/responsibilities, and assessing the results.

A primary initial task with a coach is to create a developmental action plan to achieve your goals.  After you execute the plan, you and your coach will review the results regularly and define new action plans to further your development.  Like a coach in sports, an executive coach ‘plays back the tape’ and provides guidance on how to improve your existing skills.

M. Nora Klaver, author of Mayday! Asking for Help in Times of Need and CEO of MNK coaching, takes an introspective approach when defining executive coaching, “People always talk about getting “out of the box.” Our boxes are built of all our preconceptions and existing perceptions.  The way we view life, our lives and our jobs can be incredibly limiting to us — no matter how successful we are.  An executive coach shows you how to blow up the box through insightful questions — ones you’d never ask yourself on your own — and offering new perspectives.”

Coaching is no longer negatively viewed as a way to help correct underperforming managers.  Instead, it is much more widely used as a benefit to support top producers.  Organizations worldwide spent over $2.0 billion on coaching in 2011, reported International Coach Federation and Pricewaterhouse Coopers in the 2012 ICF Global Coaching Study.  The study found that 41,300 coaches are active globally with the majority of coaches in North America and Western Europe.

Why is coaching so widely utilized?  “Because there is a great demand in the workplace for immediate results, and coaching can help provide that by providing feedback and guidance in real time,” says Brian Underhill, a senior consultant at the Alliance for Strategic Leadership.  “Coaching develops leaders in the context of their current jobs, without removing them from their day-to-day responsibilities.”

Fortune 500 companies such as IBM, GE, and Bank of America have embraced the concept and some have added coaches as integral employees of their Human Resources department.  The belief is that, under the right circumstances, one-on-one interaction with an objective third party can provide a focus that other forms of organizational support simply cannot, according to Harvard University in the Harvard Management Update.

The experiences of MNK coaching have shown that when people work with a coach they find themselves more excited about who they are and what they are doing which leads to stronger engagement, more energy, and improved performance.  The focus of coaching is to help clients “be more fully themselves by giving them new skills, tools and ways of perceiving situations.”

In order to be most successful, the client and organization must be committed to coaching and receptive to the unbiased feedback provided by the coach.  Unlike consultants, a coach is not brought in to independently assess and ‘change’ the organization or employee.  Their role is to improve the skills that already exist in high-potential individuals and leaders of the company.

Coaching is effective for executives who can say, “I want to get over there, but I’m not sure how to do it,” says James Hunt, an associate professor of management at Babson College and coauthor of The Coaching Manager.  “Coaching works best when you know what you want to get done.”  Perhaps, in spite of your outstanding track record, you haven’t yet gained the full interpersonal dexterity required of senior managers—for example, you’re not yet a black belt in the art of influence, which is so important in the modern networked organization.  Honing such a skill might be an appropriate goal for a coaching assignment.

As reported by Harvard University, coaching can be particularly effective in times of change for an executive.  That includes promotions, stretch assignments, and other new challenges. While you may be confident in your abilities to take on new tasks, you may feel that an independent sounding board would be beneficial in helping you achieve a new level of performance, especially if close confidants are now reporting to you.  More so, you may recognize that succeeding in a new role requires skills that you have not needed to rely on in the past; a coach may help sharpen those skills, particularly when you need to do so on the fly.

“One of the big benefits of a coach is that they aren’t tied to the organization, your friends, or anyone else,” says Washington, D.C.-based executive coach Linda Finkle and CEO of incedo Group.  The coach’s focus is with you only, so they support what you want and where you want to go.

“Even our families, who want the best for us, can’t be unbiased or totally objective. What you do or do not do impacts them, whether it’s positive or negative. A coach is not impacted by your decisions, your wins or losses, or anything else,” Finkle notes.  However, this does not mean that company goals are not supported by coaching.  In actuality, a coach is usually hired by the company to support the executive’s efforts to achieve those goals.  Even so, the role of the coach is not to represent specific company needs or interests.

The benefits of working with executive coaches are best summarized by their clients.  David Zimmerman, Manager of Infrastructure Engineering-Chicago Mercantile Exchange Group, states “A good executive coach provides straight forward, insightful, and honest feedback at all times.  My coach has helped me immensely and has been able to help me see myself and others in a different light, which has completely changed how I deal with each in many situations for a positive outcome.”

Written by entrabanker

March 12, 2012 at 3:50 am

Posted in Uncategorized

How to Do Internet Marketing! Demystifying SEM and SEO…

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By Karen Orlich/www.pluraFinancial.com

Ever ask yourself, “why is SEO important?”…“what is Affiliate Marketing?”, or “how do I start Display Advertising?”  These questions and more will be addressed below as we try to help you demystify online marketing.

Internet marketing offers many options for companies to reach a wide audience at a fraction of traditional advertising budgets. However, the choices are extensive and the costs can add up quickly if you do not have an educated strategy.

eMarketer reports that U.S. internet marketing expenditures are growing rapidly and exceeded US$42.0 billion in 2011 versus US$16.9 billion reported by PricewaterhouseCoopers in 2006.  And, according to ComScore, a global firm specializing in digital business analytics, the average American spent 32 hours per month on the Internet in 2010.  Persons ages 45-54 set the high bar, averaging more than 39 hours online each month.

To better understand your options, internet marketing is broadly divided in to the following types:

  • Affiliate Marketing: rewarding affiliate or partner businesses for new customers or site visitors obtained by the affiliate’s separate marketing efforts.

Affiliates promote other’s products or services as a virtual salesperson.  They do not sell the product directly but instead typically earn a commission from each sale or referral generated from their site.  According to Entrepreneur.com, your main goal should be to find affiliates that will reach untapped markets and make sure that you are not competing for the same customers.  Customers are more likely to buy through “trusted” company referrals but large affiliate networks can be time-consuming to manage.  Each affiliate should be interviewed and considered selectively before signing them up.  “Affiliates are an extension of your sales force and represent your online brand, so choose partners carefully,” states Entrepreneur.com.

On the flip side, revenue can easily be earned by joining another company’s affiliate program with no upfront cost.  The best strategy to determine which affiliates would be most beneficial to your network is to focus on your customers’ needs.  Then, join the affiliate programs that fill the gaps in your product or service offering.

  • Display Advertising: using banner advertisements on a third-party website to increase traffic to a company’s own website and improve product awareness.

Research by comScore indicates that only 8% of internet users account for almost 85% of all display ad clicks and each month, 24% to 50% of Internet users delete their cookies, depending on geography.  This makes it difficult to track a machine and overstates the unique visitors to a website by 2.5 times.  Gian Fulgoni, Executive Chairman of comScore states, “Clicks on display ads are a misleading metric and don’t reflect the cumulative impact of ads.”

Investing significantly in display advertising should be carefully monitored to determine the most impactful ad design and placement.  Furthermore if your budget can accommodate the additional cost, A/B message testing is a beneficial practice to put in place with your display campaigns; running two different banner ad designs in the marketplace both pointing to the same destination, enables a company to best understand which message/creative combination generates the most interest.  Helpful sites to assist with advertisement and competitor analysis include:

Moat Ad Search is a search engine for online display ads that allows users to track companies by name and view their current banner ads, generally with the newest ads towards the top of the search page.  This can be highly advantageous for viewing competitor ad designs.

Google Analytics offers free website statistics and analysis to site administrators to analyze traffic flow for performance focused marketing primarily cost per click advertising.

Compete provides common website analytics including total unique visitors (defined as individual visitors to the site each month, counted only once, no matter how many times they visit a month), corresponding US ranking, traffic history, and sources.

SEMrush presents competitor keyword data and estimated Search Engine (SE) and AdWord traffic for any domain.

  • Email Marketing: advertising a product, service, or brand using electronic mail.

Forrester Research, a global technology and market research company, estimated in their marketing forecast for 2011 to 2016 that United States firms alone spent US$1.51 billion on email marketing in 2011 and will grow to US$2.47 billion in 2016.  Advertisers can reach substantial numbers of email subscribers who have opted in (i.e., consented) to receive email communications on subjects of interest to them.

Almost half of American internet users check or send email on a typical day, as reported by the Pew Internet & American Life Project, with email blasts that are delivered between 1 a.m. and 5 a.m. outperforming those sent at other times in open and click rates according to the September 2011 publication of BtoB Magazine.

  • Search Engine Marketing (SEM): promoting a website through paid placement or inclusion advertising to increase visibility and search engine result pages (SERPs).  SERPs are the listings that you see after you enter a keyword or search phrase.

This can best be achieved through Adwords which is a pay-per-click advertising program offered by Google for keyword searches common to your specific business.  The more popular the word (“keyword’), the more expensive the cost per click or CPC.  This is one of the most popular and potentially costly forms of online marketing.  It is Google’s #1 revenue source with the Company reporting US$28 billion in advertising revenue in 2010.

How does it work?  As an example, in the highly competitive banking industry, words such as “business loans” show 550,000 global monthly searches and, on average, costs approximately $3.60 per click.  In this scenario, if a business chose to pay for the use of “business loans” in Google Adwords, it will cost $3.60 every time a new IP address (“potential” new customer) clicks on the “business loans” keyword reference link and is directed to their website.   Companies improve their search rankings, by entering a higher cost per click (“bid”) and total budget than competitors, through Google’s online bidding process.  Any keyword and its estimated CPC can be researched at www.adwords.google.com.

  • Search Engine Optimization (SEO): the process of improving the visibility of a website or a web page in search engines via the “natural” or un-paid (“organic” or “algorithmic”) search results.

One of the best ways to improve SEO is through content marketing.  Content marketing involves creating and freely sharing informative content as a means of converting prospects into customers and customers into repeat buyers.  “The primary goal is to obtain opt-in permission to deliver content via email or other medium over time.  Repeated and regular exposure builds a relevant relationship that provides multiple opportunities for conversion, rather than a ‘one-shot’ all-or-nothing sales approach” reported copyblogger.

In contrast to ‘interruption’ marketing such as television commercials or direct mail, content marketing involves delivering requested information with independent value that creates trust, credibility, and authority for the business providing the information.  “Content drives the Internet and consumers are looking for information that solves a problem, not immediate sales pitches,” according to copyblogger senior editor Sonia Simone.  Consequently, this can decrease sales resistance from potential new customers while also providing a baseline introduction to the advantages of a particular product or service.

There are many ways to benefit with content: blogging, video tutorials, email newsletters, white papers, and free reports.  Businesses can experience a greater success in their online marketing by, using these modes of communication with customers and prospects, providing valuable content (with periodic promotional messages), and avoiding sales “agendas”.

Think of the giant search engines such as Google having electronic “spiders” that continuously crawl through all the websites & content on the web, rewarding those sites with genuinely good, popular content while punishing irrelevant, stale, or irresponsible websites.

plura Financial, an online loan matchmaker between banks & small businesses, had the greatest success using content marketing.  According to CEO, Brandon Hinkle, “If you create fresh relevant content that’s both educational and entertaining, you’ll be rewarded by Google and customers.  Be a trusted industry expert with a delightful customer experience and good things will happen.”

  • Social Media Marketing: using various social media sites to gain website traffic and attention.

Social networking websites allow individuals to interact with one another and build relationships. When products or companies join those sites, people can interact with the product or company.

Access Markets International (AMI) Partners Inc. 2010 – 2011 U.S. Small Business Marketing Activity and Spending Study revealed that social media marketing is estimated to grow 35% in 2012.  This is considerably higher than all other marketing categories which are slowly rebounding from the economic downturn.

Social networking sites like Linkedin, Facebook, GooglePlus, Twitter, YouTube and blogs allow individual followers to “retweet” or “repost” comments made by the product being promoted. By repeating the message, all of the users connections are able to see the message, therefore reaching more people.  It can be just as critical to use social sites to highlight your management and employees’ abilities and credentials as it is to market your company and product.  Be aware of information that is ‘public’ as it can be easily obtained, misunderstood, and potentially tarnish the Company image.  The primary goal of social networking is to create awareness and interaction, with the ultimate goal of creating content that “goes viral”.

  • Referral Marketing: a method of promoting products or services to new customers through referrals, usually word of mouth.  This method is commonly known off-line and can be easily implemented in connection with your website.  This is affiliated with “link building”, which is an initiative to have other websites post your URL on their website.

Link building can be achieved either by contacting other websites directly and requesting that they post your URL, or the preferred method is that other websites genuinely admire your website/content enough to post it on their website in an unsolicited manner.

In 2009, Dropbox, a free web based service that lets you bring your photos, docs, and videos anywhere and share them easily, implemented a referral program that had a two-sided incentive for sharing: the person who signs up for Dropbox through a referral link gets more space than through a normal sign up, and the referrer gets additional space as well.  According to Drew Houston, the Co-founder and CEO of Dropbox, the referral program permanently increased their signups by 60% for the year and referrals account for approximately 35% of their daily signups.

Internet marketers also have the advantage of measuring statistics easily and inexpensively; almost all aspects of an Internet marketing campaign can be traced, measured, and tested, in many cases through the use of an ad server.  An ad server is a computer server, specifically a web server, that stores advertisements used in online marketing and delivers them to website visitors.

The content of the webserver is constantly updated so that the website or webpage on which the ads are displayed contains new advertisements when the site or page is visited or refreshed by a user.

In addition, the ad server also performs various other tasks like counting the number of impressions/clicks for an ad campaign and report generation, which helps in determining the ROI for an advertiser on a particular website.  Methods such as pay per impression, pay per click, pay per play, and pay per action can be used to determine which ads are more appealing to the viewers.  Results of campaigns can also be measured and tracked immediately by requiring a specific action such as clicking on an advertisement or visiting a website.

According to Marc Singer, an Account Supervisor at DDB Chicago, “In today’s digital world, content is king.  Consumers seek out and enjoy relevant content, and appreciate brands that make it easy for them to find engaging content in a variety of destinations.”

Internet marketing is forcing traditional marketers to change their conventional “one-way street strategy” (reach and attract prospects then convert to customers) to a “two-way-street strategy” (reach, attract, ‘engage’ prospects, convert to customers, gain their loyalty, and remain engaged through constant customer feedback).  Marketers need to better understand a consumer, how they receive info, which channels they participate in, and what their real needs are.  The best strategy is to provide customers with solutions to the problems they are looking to solve, when and where they are researching the problem, instead of trying to spray ads across television, radio, and print hoping someone will be interested and purchase your product.  These revelations are revolutionizing the marketing world and blazing a new path for the future.  In order to keep pace with competitors AND attract customers, businesses need to adopt some (if not all) of these internet marketing options.

Written by entrabanker

March 1, 2012 at 11:53 pm

Posted in Uncategorized