Deciding whether a particular marketing program is profitable to
your business is often more subjective than the accountants would
have you believe. You should not only consider the direct revenue
and costs associated with a marketing program, but you should
also think about the long-term impact on your business.
The full benefits gained from a marketing program are not
directly and immediately measurable. Many benefits happen over
time. Advertising; brand building and awareness; Web site
improvements; and other types of programs may be profitable
in the long run but costly in the short term. Often, the best
approach for these programs is to first set aside a budget, then
spend your budget on the program(s) with the most potential for
long term success.
Investments in improvements – such as a redesign of your Web site
– may seem unprofitable at first, but are nonetheless the right
thing to do. Many of these programs are beneficial because they
keep you from losing business to your competitors over time. For
these types of projects, the correct question to ask is "What
happens if I do this versus if I do not?" Know how much your
business must grow over time to make the improvement worthwhile
and compare this to your potential business growth. If the cost
is not reasonable compared to the potential, then look for other
solutions.
Another reason the benefits of a marketing program may not be
directly measurable is because new customers gained as a result
of the program may, over time, buy from you more than once (i.e.
have a lifetime value that is greater than the profit from a
single purchase). Also, happy customers tend to refer additional
customers by spreading the word about your goods and services.
Both of these factors indirectly increase a marketing program's
overall profit.
Making Assumptions
Predicting profitability can be a series of "best guesses" based
on assumptions. In fact, you could probably manipulate your
assumptions to make a program as profitable (or unprofitable)
as you wish. A more successful approach, however, is to try to
legitimately forecast profit. Be as reasonable as you can with
assumptions, and then decrease your expected revenue by 20% -
25%. Often, results (either costs or revenue) come in worse than
reasonably expected for a variety of unforeseen reasons.
Figuring Break Even Point
For promotional programs, you can decide how much to spend on the
program by figuring out your break even point. One way to do this
- while also taking into account longer term profits - is by
basing the break even analysis on the amount of profit you expect
to earn from new customers gained through the promotion, both now
and in the future. To figure the break even point in this way,
you should know:
1) the program's expected response rate,
2) the program's expected conversion rate, and
3) the lifetime value of a new customer.
Here, the response rate is defined as the percentage of those
exposed to your program that you expect will take you up on your
call to action.
For the formulas in Part 2 of this article, express the response
rate as a decimal (Examples: 1%=. 01. One-half percent=. 005)
Conversion rate definition is the percentage of responders you
expect to become customers. For the formulas in Part 2, express
the conversion rate in decimal form (Examples: 10%=. 1. 1%=. 01.
One-half percent=. 005).
The lifetime value of a new customer is the amount of dollar
profit you will make from the customer over a certain time
period. It is common to define lifetime as anywhere from 18
months to two years.
Response and conversion rates can vary widely, depending upon how
targeted your prospects are, how well your offer is written, and
how involved the purchase decision is for your product. The type
of program also has an impact on your response and conversion
rates. To estimate these rates for your program, you can look to
your past experience and/or ask the program vendor. You can also
search on general marketing and research Web sites to find rules
of thumb for your type of program. In all cases, document your
assumptions. You will need them later to analyze program results.
In Part 2 -
http://www.websitemarketingplan.com/online/breakeven.htm - I will
look at three ways to approach break even analysis, depending on
how the marketing program is structured.
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