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.
Publication Guidelines:
When publishing this article on the Internet, please make at least one URL in the "About the Author" resource box clickable. Also, please notify Bobette Kyle of publication (articles @ websitemarketingplan.com).
Copyright Bobette Kyle. All rights reserved.
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
"Get your positioning and your programs implemented properly, and the... Read More
As a self-employed professional, you have two basic strategies for... Read More
Our ego can get in the way of marketing our... Read More
Your mailing list retains its value best if... Read More
Most businesses target only people "ready-to-buy". These hot prospects are... Read More
What would you do with 500, 1000 or more additional... Read More
The world of marketing has changed. With increasingly better educated... Read More
It was probably first discovered out there in the caves... Read More
Your business depends on the success of your marketing efforts.... Read More
Coming up with an idea, seizing the opportunity, and setting... Read More
One very powerful and cost-effective marketing strategy is to study... Read More
Want a big boost in response and quick sales from... Read More
In a crowded marketplace of ideas, it is important for... Read More
Websites have replaced the brochure as the "must have" marketing... Read More
Business startup and failure rates are scary...In The USA...- Every... Read More
Is Advertising Viable?At the turn of the 20th century, department... Read More
Today's business environment has changed dramatically over the past 10... Read More
Have you ever chosen to pay attention to someone just... Read More
As the American economy emerges from recession, many businesses are... Read More
Do you want to successfully market your business franchise online?... Read More
IntroWant me to tell you something on how you can... Read More
Every now and then I will meet someone who has... Read More
©2004 Jeffrey DobkinThere are two types of lists, determined by... Read More
If you want your marketing to be effective, you absolutely... Read More
And not only your logo, but also your website, your... Read More
Sometimes, one of the most difficult things to teach beginning... Read More
Too many loan officer websites look like congested intersections, information... Read More
When people think about promoting their business, the first thought... Read More
1. Examine your clientele and define your ideal client. Of... Read More
"There are those who get things done and those who... Read More
Organizations often get stuck in neutral when it comes to... Read More
As a small business how do you compete with the... Read More
Will postcards be an advantage for you?The latest craze these... Read More
The phone rings. Good news... it's a potential client. You... Read More
Some people use the words "client" and "customer" interchangeably or... Read More
The key to great exhibiting is marketing. But marketing is... Read More
"How to Earn the Right..."Marketing your professional services is a... Read More
Why cutting your prices is like cutting your own... Read More
What is a company profile? ... Read More
Direct mail can be one of the most effective tactics... Read More
A while back a small business owner paid me a... Read More
Starting and managing a successful small business takes time, energy,... Read More
If you want to uncover a little secret about how... Read More
Joint Venture marketing has become a highly popular way for... Read More
So you've invested more time than you ever believed possible... Read More
Businesses rely on brochures as their front line in communicating... Read More
Nothing gets people buying products or programs like a special... Read More
In the international bestseller "Blink," Malcolm Gladwell explains why our... Read More
The ropers at Annie Oakley's Real Western Dudette Ranch were... Read More
What is Marketing? There are many text book answers to... Read More
One of the reasons direct mail works is the personal... Read More
Market, Market and then market some more. So many small... Read More
Several years ago, "networking" was the hot buzzword. Everyone was... Read More
If you've never done a postcard mailing, you're probably wondering,... Read More
I don't know about you, but I am still waiting... Read More
Too many business owners believe that marketing their business means... Read More
Quit spreading those chain letters, nothing is going to happen... Read More
Popular TV Series Provides a Powerful Marketing LessonSmall Business owners... Read More
Why give freebies?We have all seen freebies at trade shows... Read More
Almost every small business marketer knows that they should gather... Read More
For those new to marketing planning, the thought of completing... Read More
Recently, I've received a few e-mails from people asking me... Read More
My wife likes to shop at the local Safeway. Is... Read More
Once there was a loan officer, who marketed his services... Read More
If you run a small business you should be a... Read More
Direct mail is a cost-effective way to make sales and... Read More
Marketing |