Below are 4 important financial measurements that you need to understand when running digital marketing campaigns…
1. Conversion rates:
If you have a website that converts at 5% from visitor to lead and then 1 in 5 convert to a sale, you have a 1% visitor to sale ratio.
If there are 100k per month searching on Google for your product or services and you average a 1% CTR, then you can expect 1k of visitors each month.
From a 1% CTR and a 1% conversion rate, then you end up with 10 customers. That’s pretty bad, especially considering that you had 100,000 potential prospects.
This is exactly why improving CTR and Conversion Rates is vital.
Let’s say in both instances we increase this to 2%. This increases to 2000 visitors and 40 customers. That’s 4x more customers!
Small changes for a big impact! That is exactly what clients want. This is where you win big in any campaign and it is exactly where your attention should be focused.
It is very difficult to change the demand, but you can change the supply, so it’s important to think about ways that you can do that.
How?
- Checking in Analytics for low-performance pages, device types, locations, language etc. Use should delve into each level to see what pages/devices etc stand out from the rest, both positively and negatively in terms of bounce, conversion rates, duration etc. Fixing issues and replicating successes.
- Page Analysis, manual checks for functionality issues.
- Focus on keywords that perform well and include words that perform well, including these in Ads and landing pages. If words are seen to consistently perform well in search queries, it is because visitors and searchers value this aspect as part of the purchase journey.
2. Profit Margin:
What is profit margin?
Profit margin is the amount you take home after all costs and expenditures have been paid.
In business, margins can vary widely, not only between businesses but within businesses in terms of the products and services being sold.
When we ask clients for profit margin, we aren’t actually asking for profit margin per se. We are asking how much they want to spend on acquisition, i.e. cost-of-sale (CoS).
If you sell a product for £100. Let’s say you buy it in for £30 and it costs you £10 to pack and post it. That leaves you with £60. In this scenario, we will exclude VAT and corporation tax. To keep it simple, this means that you have £60 to spend on the sale. Of course, you don’t, because you wouldn’t make any profit. So you need to decide how much you want to spend. Spend too little and you will not generate the exposure you need to get your adverts seen sufficiently, I talk about this more below in Limitations by Budget.
As a general rule of thumb, our clients historically obtain sales for somewhere between 5% and 15% of the price charged. For example, if the product is £100, then we aim for somewhere between £5 and £15 depending on factors including their margin/market competition etc.
When clients say it is too difficult this is simply not true. Sometimes it takes time and can be difficult, but it’s certainly not impossible, you just need to segment your product or service offerings and apportion costs accordingly.
Bear in mind, that in some businesses there is a decreasing cost for every new product sold. For example, if you pick, pack and distribute one product, the cost of this won’t be the same as if you do 10, 100 or even 1000, in fact, there is likely to be a decreasing cost, meaning that either you can choose to pocket more of the profit, or reinvest to achieve more sales. Do bear in mind that if you do reinvest then there’s a point where you will spend more and make less. As with refunds and discounts explained below, if you spend 10% more on acquisition then you need to make 100 more sales to make it worthwhile, so be wise, there may not be 100 more sales available!
Remember, you must factor our fees into the cost of sales!
3. Limitations by budgets:
If the client’s product is £100 and your target cost of sale (CoS) is 20%, then you have £20 to spend on acquiring each sale. For sake of example let’s say they are aiming for a 10% profit after advertising costs, so this equates to £10 for every £100 sale.
The client states that their budget is £1000 per month, thus aiming for £100 profit for every £1000 in revenue or this can be translated to be £100 profit for every £200 spent on advertising.
If everything performs to plan you can expect to make 50 sales. 50 x £100 is £5000. 12 months pass by and they want to make more sales. They are getting a consistent £5000 per month (£500 in profit). No changes are made to the website and the sales start to worsen, this is due to more competitors entering the market. They complain and start to say that we aren’t performing as well as we were.
The client got used to the rate of growth and was measuring our success on this. They aren’t interested that we managed to sustain this for a prolonged period, only that things aren’t going as well as they were.
The client says that they don’t want to spend any more budget and are refusing to make changes to their website because they are costly.
You’ve done everything you can but CPC’s cannot be reduced and conversion rates cannot be improved.
The only way to really scale is to increase the budget.
The problem here might be that the client cannot just afford to increase the budget as it comes out of the profit and they might not have sufficient budget to play with. So the key here is to do so incrementally. If you increase the budget by double then the client would have wait 4 months before having sufficient profit to invest back into increasing the budget, this would, of course, leave them at break-even for a number of months.
Of course, by factoring in economies of scale, with the profit increasing on each sale as you scale, this wouldn’t quite equate to 4 months, it would still require a period of time to pass before budget increases are feasible.
4. Refunds / Discounts:
Let’s say you give a product away for free. That product cost you £100, but it doesn’t stop there in terms of actual cost and thus losses. How many sales does it take to make back that loss?
With one loss of £100, on a margin of 10%, it would take you 10 sales to breakeven again, so that’s 11 sales in total to break even from one loss.
That 11 sales could have netted you £100 in profit. You have also delayed making a profit by the time it takes you to make 11 sales.
With time losses it is even worse than financial losses because you have a limited amount of it! You can always make more money, but you cannot generate more time.
There are only so many Christmases, Black Friday’s or Valentine’s days to capitalise on, so if you miss them, then you are missing an opportunity.
Offering a discount is only worthwhile when you can generate more money longer-term by doing so. For example, you can offer a discount when someone buys in bulk because they were not going to do so. Offering a discount can also entice people to try your product.
But if you do what many companies do and offer a discount with a plan to increase prices then this won’t work. People acclimatize to a particular price point and people don’t like change.
I welcome any thoughts, opinions or insights on this article.