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. 

Bobette Kyle draws upon 12+ years of Marketing/Executive 
experience, Marketing MBA, and online marketing research in her 
writing. Bobette is proprietor of the Web Site Marketing Plan 
Network - http://www.websitemarketingplan.com - and author of 
the marketing plan and Web promotion book "How Much For Just the 
Spider? Strategic Website Marketing For Small Budget Business": 
http://www.HowMuchForSpider.com