www.poludas.com

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

Share This

Many business people wonder why they have such a difficult time launching a new product or service. Most do not invest time researching two key issues: whether or not there is a viable market for what they want to offer and what the competition is already doing to satisfy the market.

Why would an experienced businessperson ignore that vital step?

1. Ego: They have a “great idea” and figure that all they have to do is advertise and customers will line up to buy.

2. Ignorance: They think they are the only one to offer what they offer and so they have no competition.

3. Poor Planning: They do not have enough capital to get the job done adequately.

In order to avoid these mistakes and plan for success, ask yourself the following questions:

–What is your actual, specific, detailed market?

–Do the prospects already understand what you are offering?

–Are there enough customers out there to support a profitable business?

–If prospects are out there, how do you reach them with specific sales messages and make it easy for them to buy?

–If you have to educate prospects about the benefits of your product or service, how much time and money will that education cost before you make a sale and gain an income?

–Who are your competitors from your customer’s point of view, not your point of view?

–How are you going to effectively compete with all of those competitors?

If you take the time to answer these pointed questions before you launch that new product or service, you will have a much better indication of the risk of your venture. And the possible return on that risk as well. If you are willing to take that risk, you can at least make sure the deck is stacked in your favor!

Gloria Berthold is president of Marketing Outsource Associates, Inc. a full-service marketing firm specializing in the identification of potentially profitable prospects in the commercial and government business markets. She is an expert at business development and a nationally recognized speaker. For more information, visit http://www.targetgov.com

Share This