Profitable Marketing Programs - Part 1
by Bobette Kyle
Published on this site: June 17th, 2005 - See
more articles from this month...
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:
- the program's expected response rate,
- the program's expected conversion rate, and
- 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
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