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Indirect Profit Considerations A profit and loss form ( http://www.websitemarketingplan.com/small_business/P_L_Form.pdf ) clearly identifies direct revenue and costs. Other considerations are missed. Indirect benefits of marketing, competitor activity, and long-term implications are less tangible. Much business growth (and consequently, profit) happens over time. Programs that appear expensive may -- indirectly and in the long run -- be profitable or even critical to survival. Examples include: general advertising campaigns, a new Website (or improvements to an existing one), awareness-building activities, and charitable contributions. Potentially, all have an indirectly positive impact on revenue and profit. Indirect Impacts on Profit These types of programs keep the business competitive over time, so it does not lose sales to competitors. The correct approach to these types of activities is to ask "What happens if we do not do this?" instead of "How much money will we make with this?" When making final budget decisions, compare the costs to the downside of not executing. Repeat sales and word of mouth are other profitable, indirect consequences of marketing activities. The formulas behind P&L figures sometimes ignore the lifetime value of new customers (i.e. profit made from future sales to new customers), for example. Also, satisfied customers tend to recommend goods and services to others, another indirect profit source often ignored. How do you set reasonable budgets for such activities? Integrating Indirect Profit into Break Even Point Analysis Knowing the break even points for finite promotional programs can help with budgeting decisions. One way is by incorporating lifetime values into break even analyses. To do this, you should know: 1) The expected rates of conversion: The percent of those exposed to the program who become customers. 2) Lifetime value of a new customer: The average profit, in dollars, you expect to make from each new customer over the next two years. The formula for lifetime value is: Lifetime Value = (Average # of purchases over lifetime) X (Average $ profit from each sale) 3) The number of people who will be exposed to the marketing program (impressions). There is no general rule of thumb for these numbers. They can vary widely, depending on your industry, the type of program, the type of product, the marketing copy, where potential customers are in their purchase decisions, program execution, and more. Estimate by applying what you've learned from past experience, asking the program vendor, and researching a particular program online. You will find, for example, that Website banner ads have a much different response rate than search engine pay per click ads. Write down the reasoning behind each of the numbers you use in the breakeven analysis. You will refer to them later when analyzing results. To figure the breakeven point in dollars, multiply the number of impressions times the conversion rate times the lifetime value: Break Even Point = (Number of impressions) x (Expected conversion rate) x (Lifetime Value) In general, the break even point is the most you can pay for a program without losing money. The accuracy of this formula, however, is open to debate. It does not take into account "word of mouth marketing" generated from new customers or customers who make future purchases as a result of exposure to the program. Keep these subjective, non-quantifiable factors in mind when making budget decisions and you will build healthy long-term foundation for your business. Bobette Kyle draws upon 15+ years of Marketing/Executive experience, online marketing experience, and marketing MBA as inspiration for her writing. She is proprietor at www.WebsiteMarketingPlan.com, where you can find more marketing and management articles at: http://www.websitemarketingplan.com/marketing_management | ||||||||||
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