Marketing Math: Key Metrics to Maximize Marketing Dollars

Marketing MATH:
Formulas to Maximize Your
Marketing Dollars

Bit.ly/mktgmath

1

What’s that Formula?

These slides include

All of the marketing math formulas

You’ve probably heard about

But never understood . . .

2
© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved.

Marketing Math Formulas for:

• Marketing • Social Media
Contribution • Engagement
• ROI • Conversion Rate
• Expense to Revenue • Revenue Per Email
• Budgeting Formulas • CTR
• Breakeven Analysis
• CPA Benchmarks
• Lifetime Value

3

Marketing Contribution
$ Sales
Shipping and Handling Fees

Gross Revenue
Returns and Bad Debt

Net Revenue
Cost of Goods Sold (COGS), shipping, 800#, credit card costs

Gross Profit
Marketing Costs

Marketing Contribution (to profit and overhead)

4

ROI: Return on Investment

Marketing Contribution
MINUS Overhead Contribution (typically % of sales) =
= Net Profit

ROI = Net Profit
$ marketing cost

$10,000 net profit / $50,000 marketing cost = 20% ROI

(the return on the investment before interest and taxes)

5

For Every $1 . . .

For every $1 spent on Marketing, we generated $5.50 in
Revenue.

$27,500 revenue = $5.50
$5,000 marketing

For every $1 Revenue, Cost was $0.18 for Marketing.

$5,000 marketing = $0.18
$27,500 revenue

6

Marketing Expense to Revenue

Expense to Revenue Ratio =
Total $ Marketing cost
$ Revenue generated

If Marketing costs are $5,000 and we generated $27,500 in sales:

$5000 X 100 = 18%
$27,500

• Our Marketing expenses were 18% of Revenue generated

7

PLANNING METRICS
Budgeting – with $ Sales Target

Sales Target $100,000 = 500 Target Orders
Average Order Size $200

• Cost Per Sale (based on Past Year or Campaign) =
$ Marketing Cost / # Orders
$50,000 / 625 = $80

Marketing Budget =
Cost Per Sale X 500 Target Orders
$80 X 500 = $40,000

8

Budgeting – with # New Customers Target

New Customer Target = 1,000

Past Cost Per Order = $ 80 (CPO)

Marketing Budget = 1,000 X $80 = $80,000

• Boss says: “you can only have $60,000.”
• Your only options:
– Reduce new customer target
– Only use marketing vehicles that deliver customers at $60 CPO -- if
you’ve identified any

9

Breakeven Analysis (Incremental*)
Gross Profit Per Sale =
Average Order Size MINUS direct product costs per order
$79 - $39 = $40

Breakeven Quantity =
Total $ Marketing Cost / Gross Profit Per Sale
$50,000 / $40 = 1,250
orders needed to recover the marketing costs.

Breakeven Response Rate =
Breakeven Quantity / # Reached
1,250 / 65,000 = 1.92%

• Only incremental revenue and costs of a sale are considered, without overhead and profit requirements.

10

Breakeven Analysis (Incremental)

Other Equations . . .

Cost Per Contact =
Total $ Marketing Cost / # Reached
$50,000 / 65,000 = $.77 each

Breakeven Response Rate =
Cost Per Contact / Gross Profit Per Sale
$.77 / $40 = 1.92%

11

Breakeven Analysis with Overhead –
Physical Product

$80 Sales Price + $19 Shipping & Handling =
$99 Gross Revenue per Sale

Returns and bad debt (6%) = $ 4.80
Cost of Goods Sold (COGS) = $16.00
Credit card processing fee (3%) 2.40
800 number ($2/call @ 20% of callers) 0.40
Shipping & Handling costs = 15.00
$38.60

$99 - $38.60 = $60.40 Gross Profit per Sale

(continued)
12

Breakeven Analysis:
With Overhead

Gross Profit Per Sale = $60.40
Overhead (10%) - 8.00
Breakeven Allowable Cost Per Sale = $52.40

Profit (30% of COGS) - 4.80
Marketing Allowable Cost Per Sale = $47.60

Bring in each Sale at a cost of $47.60 to cover overhead and profit.

13

BENCHMARKS:
How much can you spend to acquire a
customer? (CPA)

• Are you willing to just breakeven on each new customer?
(Can you rely on customer Lifetime Value to generate profit)?

CPA = Gross Profit Per Sale (incremental breakeven without overhead)
OR
CPA = Breakeven Allowable Cost Per Sale (breakeven with overhead)

• Do you need to make a profit on every first sale?

CPA = Marketing Allowable Cost Per Sale

14
© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved

CUSTOMER ANALYSIS:
Lifetime Value (LTV)

LTV =
Average $ Sales from Each Active Customer Per Year
X Average # Years as Active Customer

(continued)

15

Lifetime Value

“Database Snapshot” Approach

1. # “Active” Customers
(Customers as of 1/1/12 who made at least one additional
purchase in 2012, or your definition of “Active”)

2. Total of all $ sales from those Active Customers over past year

Total $ Sales from Active Customers last year =
# Active Customers last year

Average $ Sales Per Active Customer Per Year
(continued)
16


Lifetime Value

For EACH “Active Customer” in 2012:

Month/Year of Last Purchase (in 2012)
MINUS
Month/Year of FIRST purchase (first purchase from you)

= # Months as Active Customer

Total Months from all Active Customers 12
# Active Customers Last Year

= Average # Years as Active Customer
(continued)
17

Lifetime Value

Total Sales from Active Customers Last Year = $400,000 =
# Active Customers Last Year = 20

$20,000 Average $ Sales Per Active Customer Last Year

Total # Months “Active” from all Active Customers = 8000 = 40 =
# Active Customers Last Year = 20 12

3.3 Average Years as Active Customer

LTV = $20,000 X 3.3 = $66,000 per Active Customer

18

Social Media Metrics
What should you measure with Social Media?
Engagement or Conversions as a % of Total Likes or Followers

Facebook: # Comments and Update “Likes”
# Page Likes

LinkedIn # Comments and Post Clicks
# Following

Twitter replies + retweets + mentions + favorited*
# Followers

* All of these are reported under “Interactions.”

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© 1991 - 2013 ResponseFX.com, a Division of Strategic Marketing and Advertising, Inc. All Rights Reserved..

Email Metrics

Revenue Per Email = $ Sales
# Emails Delivered

Click-Through Rate (CTR) = # clicks
# emails delivered

20

Websites

Visitors to Leads Conversion Rate =
# leads generated for a period
# web visitors for the period

Visitors to Sales Conversion Rate =
# sales generated for a period
# web visitors for the period

21

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© Copyright 2012 Strategic Marketing and Advertising, Inc. All Rights Reserved.

Marketing Math: Key Metrics to Maximize Marketing Dollars

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Marketing Math: Key Metrics to Maximize Marketing Dollars