Profitable Marketing Programs (Part 1)

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

---

10 Reasons Why Businesses Fail at Marketing.

1) They don't fully understand it.Perception: Marketing is advertising. Reality:... Read More

Five Joint Venture Marketing Skills A Small Business Owner Must Have

Joint venture marketing is a lucrative way of leveraging the... Read More

Tradeshow Booth Cures - Living Color

Feng Shui is the Ancient Chinese practice of configuring home... Read More

Winning At Business With Your Marketing Game Plan

Stuart from Colorado had talked to a number of marketing... Read More

Postcards: Awareness Tool or Selling Tool?

Are postcards better for building awareness or for selling?In my... Read More

Why Most Marketing Videos Dont Work

Every now and then I will meet someone who has... Read More

Break Even On Your Next Direct Mail Campaign...And Still Generate Huge Profits

With direct mail, you can break even and still claim... Read More

Incestuous Relationship Between Football and Marketing

Thousands eyes were fixed. Hearts were beating hard against the... Read More

Your Ideal Client

A lot of small businesses make the mistake of thinking... Read More

Lessons Learned at the Harvard Business School

"If God wanted to create a perfect punishment for a... Read More

Marketing: Can I Trust You?

We live in an unprecedented era of communication. Because of... Read More

What Are People Buying Online?

Benefits, that's what!Whether you're selling in print or in person,... Read More

How to Market and Protect Your New Ideas

The intellectual property transfer market is now estimated to be... Read More

How to Connect Features and Values

"Buy this magazine or we'll shoot the dog," went a... Read More

Customers: The Key To Successful Marketing

How well do you know your customers?What is the primary... Read More

Your Headlines Are Key To Your Success Or Failure. Do You Know What To Write?

Most professional copywriters would say that headlines account for 80%... Read More

Insiders Secret to Selling Mailing Lists

If you've got a mailing list of at least a... Read More

The Bare-Bones Basics Of Multi-Level Marketing

Multi-level marketing is the biggest growth industry in the 1980's.... Read More

Should You Clap For Your Customers?

Does it make sense to clap for your customers? It... Read More

Value Proposition is the Key to Success

Value proposition is treated as the standards or service that... Read More

Testimonials - FREE Quality Advertising FOR YOU!

Every business person who has any kind of product or... Read More

Niches - The Path to More Profits

Hey, as business owners we CAN'T be all things for... Read More

What to be Successful? Marketing Makes the Difference

When you hear the word "marketing" what comes to mind?... Read More

The 7 Commandments of Marketing

Marketing is the key to success with any business, online... Read More

Creating Assets: Spark Your Thinking With These 16 Comprehensive Questions

Here are some questions to get your thoughts and cash... Read More

Why You Dont NEED a Marketing Plan

If you pick up a copy of the November 2003... Read More

Sell Your Name, Not Your Product

Do you know what the majority of people sell? I... Read More

Trigger Button Marketing

Sometimes, experiencing bleak sales is a matter of failing to... Read More

Moving a Business Relationship from Free to Fee: Power of Freebies - Part 2

In the last issue we looked at 5 reasons why... Read More

People Do Business with People They Like

People do business... Read More

Telemarketers Dont Like Them? Heres An Idea For Ya!

Telemarketers... ooohhh... I'll bet we've all got a nice story... Read More

Fundraising Letter Envelopes: How To Make Them Irresistible

Readers spend only a few seconds deciding the fate of... Read More

To Be Successful Sell to Wants not Needs

My mother used to tell me, tongue in cheek, that... Read More