| |
| |
|
Marketing Information |
|
|
|
Profitable Marketing Programs Part 2: Figuring Break Even Point
In Part 1 -- http://www.websitemarketingplan.com/online/profit.htm -- I discussed how to consider both long term and short term profitability in your marketing programs and assumptions that go into conducting a break even analysis. Here in part 2, I will look at three different break even formulas. Figuring Break Even Point To figure the break even point, you should know the program's expected response rate, the program's expected conversion rate, and the lifetime value of a new customer. In the formulas below, the response rate and conversion rates should be expressed as a decimal (Examples: 1%=.01. One-half percent=.005). The lifetime value should be expressed in dollars. For more details, please read Part 1 of this article. Figuring Break Even Point Based on Lifetime Value The lifetime value formula requires you to make assumptions about how many times a customer will purchase from you over a period of time (usually around 18 months to two years) and the average profit on each sale. For average profit, start with your total sales dollars and subtract cost of goods; distribution costs; advertising and marketing expenses; and any other variable expenses related to making product and filling orders. You may also want to figure income taxes into the equation. Divide the average profit number by your total number of transactions. You can then figure the lifetime value using this formula: Lifetime Value = (Average # of purchases over lifetime) X (Average $ profit from each sale) If you are paying for the program based on customer acquisition (i.e. you only pay if a lead generated by the program converts into a customer), you generally want to pay less than the lifetime value per customer in order to make a profit. As an example, say on average you make $20.00 profit from each sale. Also, on average, a customer will buy from you 1.5 times over the course of two years (here, the "lifetime" is considered two years). Multiplying the two figures, that means each new customer will generate $30.00 in profit for your business. So, you break even on the program at a cost of $30.00 for each new customer. Pay Per Click (PPC) Break Even Point But what if you are paying on a pay per click (PPC) or pay per action (PPA) basis, a certain amount for each lead the program generates? In this case, you are paying for all of the leads (or visitors) who do not purchase as well as those who do. You therefore have to factor in the conversion rate to find your break even point: Pay Per Click Break Even = (Expected conversion rate) X (Lifetime value) Continuing the example above, the lifetime value of each new customer is $30.00. Also, on average, 1 out of every 200 leads (clicks or actions) generated from the PPC or PPA program convert into customers for you. $30.00 times .005 is .15, or 15 cents. In other words, each click or action is going to be worth no more than 15 cents to you. If you have a two-step process to help improve conversions, you multiply in the conversion rate of the intermediary page (if you are generating leads or action for more than one program on your intermediary page, don't forget to factor all of them into your conversion rate). For example, if your PPC ad lands on a lead-generating page that sends 13% of visitors to the sales page described above, and the sales page turns 5% of those leads into customers, then you multiply the lifetime value by both conversion rates: $30.00 times .13 times .05 = .195, or 19.5 cents per click or action. In that case, you would want to pay no more than 19.5 cents for each click or action. CPM Break Even Point What happens if you are paying per thousand exposures (in other words, CPM - a flat rate for each 1,000 subscribers, visitors, or email addresses exposed to your message)? Now you should consider response rate as well as conversion rate and lifetime value. To figure out your break even CPM: CPM Break Even = 1,000 X [(Response Rate) X (Conversion Rate) X (Lifetime Value)] To profit from new customers gained through the program, you must pay less than your break even amount. Before making final decisions, however, consider other factors the break even analysis does not address. Any additional internal resources required to implement the program, for example, are additional costs. Remember, too, that profit impact goes beyond the purchases your new customers make. New customers gained by word of mouth (originating from but not a direct result of the program), increased awareness due to the promotion, and increases in off-line sales are indirect benefits of the program. In the long run, these all result in additional sales. Opportunity costs may come into play as well; consider if you could better use your time and money to implement more profitable programs. With each marketing program you implement, if you are aware of your break even point -- the point at which the program becomes profitable to you -- and make decisions based on those profits, your business will grow. 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/TOC.htm
MORE RESOURCES:
Marketing - Google News |
|
|
|
RELATED ARTICLES
Eliminate Your Competitors With 2 Simple Steps In business, having competitors goes with the territory. There's almost always someone selling the same product or service you are selling, or at least trying to solve the same customer problem you solve. How to Promote Yourself Or Your Company Through Award Competitions There isn't a day that goes by that I don't receive some sort of announcement about an awards competition. We get so many, in fact, that I have created a special place on my website where you can learn about what opportunities are awaiting. Create Free Internet Buzz with Your Workforce There are many different ways to increase your traffic on the web. Just as there are get rich quick schemes, there are get traffic quick schemes. Dont Advertise Your Business - Market It! Too many business owners believe that marketing their business means just paying for a few ads. What few understand is that Advertising is not the same as Marketing. Listen To What The Marketing Experts Say But more importantly, watch what they do. If you do much online shopping, you're sure to have seen some great, and not so great, sales letters urging you to get that oh-so-fabulous product that will solve all your problems right now. Trade Show Marketing - Getting Prepared for the Big Event With the increase in number of tradeshows being held across the world, it has become imperative to check the trade shows' credentials before you commit participation. Here are some quick tips on checks to ensure that you are not heading for a dud trade show:1. Notable News - Its Not About You! You enjoy what you do. In fact, you love your product and want to tell everyone about it. Keeping Pace with Business Marketing Today's business marketing rules are different than they were in years past. Those rules that once focused predominantly on local and regional business marketing have now gone global, thanks in large part to the creation of the Internet. Are You a Marketing Octopus, or a Marketing Worm? One of the greatest challenges to effectively marketing a business is determining which marketing method is best for your business.Most people look at what their competitors are doing to market their businesses and then simply imitate that, whether good or bad. The 7 Areas of Marketing Waste - Are You Committing These Marketing Sins? If you want to reduce waste and grow your business it can be useful to know where to look. Marketing waste is usually most apparent in these 7 key areas:1. Financial Services Marketing Insights: A Marketing Compass What we now call "marketing" began long before the name was coined. In the mid-1800s, traveling salesmen dressed "snake oil" and other tonics in fancy packaging and extolled their virtues to a gullible public. Is It Time To Kill Your Marketing Program? Ouch . . Keeping Your Mailing List Clean and Efficient Your mailing list retains its value best if it is kept clean and efficient. This report will first talk about why you should maintain your list in this manner. A Different Perspective On The No-Call List The other day I received an e-mail from an internet marketer who was bemoaning the fact that calling people on the no-call list is now illegal and that puts such limits on marketing. He is far and away not the only one with that viewpoint; I find it almost everywhere I look. Non-Aggressive Marketing Ideas for Enterpreneurs Do you cringe at the thought of trying to promote your business ? Does it feel like "selling yourself" or egotism? Many individuals are not comfortable with marketing dimension of running a business.This leads to an inner frustation for many and inner conflicts. Dramatically Improve Your Marketing Results With These 6 Simple Steps What if there were things you could start doing now that could help you to market more successfully in the future? Even if you didn't have your marketing act together over the past year. Well, there are. Getting Ideas for Your Postcards If you're going to do postcard marketing on an ongoing basis, it's a good idea to have a collection of cards to inspire you. In advertising and marketing circles, this is called a "swipe file. So You Want To Cut The Crap And Get Into The Money? So, you´ve been around for a while, and maybe even made a few bucks, but you still need something.. Effective Marketing For any business to be successful whether on or offline it has to be marketing effectively. You are going to need more than a great looking site with fabulous products or services to obtain success. Good Vibes/ Bad Vibes Have you ever walked into a store or business and felt uncomfortable there for no apparent reason? Have you ever walked into a store all happy and left quite frustrated? Have you ever wished your house could feel happier? The process called energetic clearing can make a significant improvement to any location.There are many kinds of energy all around us.
|
| home | site map |
| © 2006 |
