“You know, as long as we break even, I’ll be happy with the work you do.” – Countless clients we’ve worked with
What? We’re not in business to break even. If you are spending $95 to make a $100 sale, you are almost certainly losing money once you factor in overhead such as your rent, licenses, and electric bill. On top of that, it might even be possible that you could make more money by closing up shop, taking your $95 and putting it in an index fund that delivers an annual 10% return. Let’s get rid of the idea that as long as your Facebook ads, SEO, or Adwords campaign doesn’t lose money, you should be happy with the results.
What is your expected rate of return?
Without getting too much into MBA talk, how much money do you expect to make off a new customer? (profit, not gross sales) Taking that into consideration, how much does an Adwords campaign need to make in order to be successful? There are a couple factors that you should be considering before you answer this question.
- How risky is the plan? If you’re looking at spending money on something whose likely results you are unsure of, you should be projecting a chance of making a lot more money than if you were to do something safe and tested. If no one in your industry has ever successfully driven business through Snapchat geofilters, it may be something worth looking into, but it your forecasted sales are not sky high, it may be worth doing something with a more proven ROI.
- What is your customer lifetime value? When you think about that new customer, you need to consider the entire lifetime of your interaction with that customer. Here’s a simple calculator to help you figure out your customer lifetime value.
- If you know that you have a high likelihood of getting a referral from a new customer, make sure that you take that into consideration. Let’s say that one in ten customers send you a referral; take whatever your customer lifetime value is and multiply it by 1.1.
Please stop thinking in terms of breaking even.
Know how much you will make over the lifetime of a new customer and don’t spend more that 25%-33% of that number to acquire that customer.
If you are spending $9 to sell a product with a $10 profit, you may think that you’re making $1, but you’re not taking into consideration the overhead costs. Running a marketing plan and a business like this is a sure way to fail. If a marketing channel costs your $9 to sell a product with a $10 profit (or contribution margin), you need to pick another medium to advertise in. Between Facebook Ads, Paid Search through Adwords or Bing, SEO, or any one of the myriad traditional advertising media, there will be a channel that will prove itself profitable. The key is to recognize which are not profitable, because we are not in business to break even.