Posts Tagged ‘Term Implications’

In the strictly quantitative world of accounting, an “indirect profit” line does not exist on the P&L form. Every marketer and small business owner knows, however, that many aspects of profitable marketing are not clearly apparent or quantifiable.

Indirect Profit Considerations

A profit and loss form 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 (http://www.websitemarketingplan.com/small_business/P-L-Form.htm) 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 http://www.WebsiteMarketingPlan.com, where you can find more marketing and management articles at: http://www.websitemarketingplan.com/marketing_management

Author: Bobette Kyle
Article Source: EzineArticles.com
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As the Southern Nevada business community continues to feel the strains of a down economy, executives are faced with tough decisions concerning how to cut budgets. One item that is often cut is marketing. While these cuts may appear to have little impact and improve the firm’s bottom line, the inverse is actually true. In fact, cutting marketing budgets is a short-term fix that can have long-term implications on a company’s success.

According to a study by McGraw-Hill Research, companies that consistently advertise even during recessions perform better over the long-term. The study looked at 600 companies from 1980 to 1985. It found businesses that maintained or raised their level of advertising expenditures during the 1981 and 1982 recessions had significantly higher sales after the economy recovered. More specifically, companies that advertised aggressively during the recession had 256 percent higher sales revenue than those that discontinued advertising. A recent article on Forbes.com stated that companies that did not maintain a consistent presence during a past recession actually spent four to five times the amount it saved in marketing to regain its market status.

While budget cuts are necessary and it may be hard to justify large numbers allocated to marketing, it is important to remember that keeping the company’s name in front of customers is important. Public presence can lead to new business, and if you are not appearing, you are disappearing from the market – especially in the eyes of the consumer.

Instead of cutting budgets completely, executives should consider more cost-effective ways to reach audiences. The advertising and marketing industry has changed dramatically over the last five years. Companies are now using a mixture of marketing strategies to reach audiences including online marketing, grassroots outreach, co-branding opportunities and media relations.

One of the most cost-effective solutions is online marketing. With the emergence of digital media and social networks, it’s easier than ever to reach specific audiences directly. By using HTML e-mail campaigns, social media networks, online forums and blogs, and company Web sites, companies are able to post information instantly about new developments and correspond with customers in real time through the Internet. The cost associated with this communication medium is significantly lower than its predecessors, which often included fees to print and/or place collaterals piece or ads. One of the main benefits to online marketing is the ability to track the results through numerous online channels.

The Internet also allows companies the opportunity to participate in ongoing conversations about their industries. Over the last few years, the public relations sector of marketing has expanded to include online blogs and citizen journalists in addition to traditional media outlets. In many instances, companies can secure coverage for a news release or trend story ideas more quickly and with greater control of the initial content.

While it is important to explore new outlets for communicating to your audiences, an economic downturn can provide many opportunities to get more exposure in traditional outlets for less money. Publications are increasingly willing to negotiate on rates for placement advertising than they had been in recent years. Many publications are willing to give companies special pricing on long buys and offer deeply discounted prices on open space once the publication is laid out. Publishers would much rather fill the space at a discount than run the risk of leaving it empty.

In addition to price, companies who remain in the media strengthen their voice. With so many companies cutting budgets and pulling back their marketing efforts, those who remain enjoy more exposure. This is true both in print ad placement as well as media relations activities. With fewer and fewer ads appearing in publications, companies are going from one of many to one of few. Continuing to advertise gives them the opportunity to stand out.

Ad placement is not the only way companies are currently saving money. Printers, promotional vendors, graphic designers and even agencies are adjusting pricing to compete in today’s market.

Marketing during a down economy can be a very strategic business decision for any company. The key is to use an integrated approach that combines a variety of different communications disciplines. Companies should use this time to examine the way they are reaching out to their audiences and adjust accordingly. Maintaining a consistent and effective conversation with customers, especially in times like these, will lead to long-term growth and success for any company.

Kassi Belz, APR,
Director of Client Services,
MassMedia Corporate Communications
http://www.massmediacc.com/

Author: Kassi Belz
Article Source: EzineArticles.com
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