Add it up

May 01, 2008 9:30 PM  By

One of the most surprising compliments a marketer can receive is, “wow, you brought a calculator to the meeting.” More and more, marketers have to be responsible for the profitability of their campaigns. Knowing how to calculate the dollars and cents of every advertising effort — campaigns, mailings, events, you name it — provides the information needed to allocate the budget efficiently. But knowing the pro forma financials isn’t the only benchmark of monitoring the health of the company.

Whether learning the mathematics behind calculations or identifying key areas of a business scorecard, you must provide the critical reporting that your company values. For example, a clothing marketer may place higher emphasis on returns, while a gadgets company may focus on items per order. A gift seller may look at the number of recipients, whereas start-ups want to manage the number of new customers.

As marketers, start in your own back yard. What’s relevant in the marketing world? Online, offline and retail.

For business-to-business, the emphasis may include online and offline criteria, as well as very different metrics within database marketing such as number of new leads from a variety of sources, conversion, repeat purchases, upsells and additional customers from the same organization.

Since too much information is not actionable, your objective is to keep your scorecard on one piece of paper. As a marketer, begin with the greatest asset: customers.

Customers (compare year-to-date, this year vs. last year)

  • First-time buyers (new to file)
  • 12-month buyer count
  • 12-month buyer count with promotable e-mail address
  • One-time buyers
  • Two-time-plus buyers
  • Catalog requests

Include specific information relevant to your company such as:

  • 12-month loyalty program members
  • New-to-file proprietary credit-card holders
  • 12-month proprietary credit-card holders
  • 12-month “XYZ-product” buyers

As you outline the data, evaluate the percent change year over year (“this year divided by last year, minus one”). In the “Marketing Scorecard” chart, right, the 12-month buyer file increased by 2%. That’s healthy. You’ll need to evaluate if the 2% is commensurate with planned marketing activities.

The same holds true with the increase in two-time-plus buyers and decrease of one-time buyers. In total, this is exciting. It appears as though one-time buyers are converting to two-time-plus buyers stronger than last year — that’s a very good thing.

If you have retail stores, you may be able to track customer traffic, coupon redemptions and/or special item purchases. The goal is to report how customers are responding this year vs. last year.

For marketers, online marketing is often part of the overall department reporting. You’ll want to include key metrics such as number of visitors, conversion to buyer rate (buyers versus visitors) and abandon rate (orders versus shopping carts created).

If you’re a b-to-b cataloger, perhaps revenue per lead is important. If you’re a fundraiser, then include revenue per donor. You have to customize the scorecard to fit your individual organization

Develop a scorecard you can update monthly (or as often as your database or IT department allows). Monitoring the information on a regular basis gives you time to react to trends — and the scorecard makes for a nice cheat sheet during meetings.

Now the calculations It’s important to know the formulas for metrics, as well as to understand how to interpret and use the data. Here are five examples of marketing metrics to help you manage marketing efforts with fiscal responsibility.

  1. Advertising ratio: This is the total advertising dollars divided by gross demand sales (GDS). Industry benchmarks will reveal a ratio of 25% to 30%. But in b-to-b the ad ratio is usually up to 10 points lower. For your organization, review last year’s information. Calculate the ad ratio for each campaign. You’ll find trend information among similar types of projects that you can use going forward.

    For example, refer to three direct mail campaigns from last summer:

    • June: Advertising expense $10,000 divided by $60,000 GDS yields 16.7% ad ratio

    • July: Advertising expense $10,400 divided by $53,000 GDS yields 19.6% ad ratio

    • August: Advertising expense $15,000 divided by $80,000 GDS yields 18.8% ad ratio

    The range of 16.7% to 19.6% gives you guidance when planning for next year. If you have grand ideas to increase circulation, use the ad ratio to determine the revenue you need to maintain the selling ratio of 20%.

    Just use the budgeted expense of $20,000 and divide by the 20% ad ratio to reveal $100,000 gross demand is required. Check your circulation plan and ensure you can achieve the gross demand sales. If not, rethink your circ strategy.

  2. Sell profit: Sell profit is a calculation used by marketers to align marketing ratios with the profit or loss statement (P/L) of the company. Using your company’s year-end P/L, find two ratios: the advertising expense to gross sales and the gross margin percentage.

    To calculate sell profit, subtract the advertising percentage from the gross margin percentage. In the example above; 60% (gross margin) minus 25% (advertising ratio) is 35% sell profit. This measurement tells you that after inventory for the project is paid, and the advertising expense is paid, you have a percentage of the money available for the rest of the company.

    The company retains 35% of the dollars generated to manage the rest of the business. Since fulfillment is 13% and general and administrative expenses are 10% for a total of 23%, the project is running in the black (35%-13%-10%).

    Companies like marketers to use a sell profit calculation because marketing’s job is to generate gross demand. Marketing’s role is not to manage cancels, returns, gross margin, fulfillment or general and administrative expenses.

    But what marketing can do is drive gross demand and manage marketing expenses. Each type of campaign may have its own gross margin. Check with a merchant and ask what their gross margin estimate is. Usually campaigns involving a sale effort will have much lower gross margins than a full-price effort. A “best of” catalog may have a much higher gross margin than a general line book.

  3. Impact of page count change: To calculate the impact of changes in catalog page count, first calculate the percentage difference between the new page count and the old page count. If the new page count is 76, and the old page count is 68. The formula is (76/68)-1 to yield 11.8%

    Take 11.8% and divide that in half, giving the marketer 5.9% as the impact (or lift) of the additional pages to the catalog. The marketer now uses 5.9% as the multiplier to each individual segment dollar per book ($/bk) performance.

    If a customer segment generates $17.15 per book, the effect of the increase of page count is now $18.16. If a prospect list is $0.90 per book, the new plan should be $0.95.

    The same methodology is true if the page count decreases. If the new page count is 68 and old is 76, the percent change is (68/76)-1 for 10.5%. Half is 5.25%. The marketer applies a decrease of 5.25% to the $/bk for each segment. Using the $17.15 $/bk segment from above, the decrease in page count will yield $16.25.

  4. Cost to Acquire a Customer: Marketers need to understand how much it costs to find a first-time buyer. It’s not unusual for each company to calculate the cost a little differently. Here’s a simple formula.

    Assume the prospecting effort generated 1,000 new customers with $80,000 in gross demand and the advertising expense was $55,000. Using the formula we just discussed for metrics, follow the formula as:

    Gross Demand Sales × (Gross Margin % – Fulfillment % ) minus Advertising Expense

    • $80,000 × (60% -13%) – $55,000
    • $80,000 × (47%) – $55,000
    • $37,600 – $55,000 = -$17,400

    Take the -$17,400 and divide by the 1,000 new customers to reveal a $17.40 cost to acquire a new customer. If you don’t have your company’s gross margin percentage or the fulfillment ratio, use the ones in this example to calculate the cost to acquire. This will allow you to become comfortable with the formula and calculation. Then go to your favorite accounting person for the correct ratios.

  5. One-year payback: Now that you know how much it costs to acquire a customer, it’s important to calculate whether you can recoup your costs in one year.

    This calculation is a little tougher because you need to do a bit of database mining and investigation on the current 12-month buyers. Here’s what you need:

    Using the letter references, the calculation is:

    • (( a * b * c) * (d – e)) – (f * g * a)

    • (( 1,000 * 40% * $99) * (60% – 13%)) – ($0.65 * 7 * 1,000)

    • (($39,600) * (47%)) – ($4,550)

    • ($18,612) – $4,550

    • $14,062

    Now take the $14,062 and divide by the number of orders for the 12-month period (a * b or $14,062 / 400 = $35.16).

    The $35.16 represents the 12-month payback. Looking back to our cost-to-acquire calculation of $17.40, the annual payback answers whether we’re able to recoup the investment. Yes! And if the company would like to continue investing in prospecting, they could be as aggressive as $35.16 to break-even during the first 12 months.

The scorecard keeps a year-to-date review of key performance metrics and compares current year performance to last year. Always confirm ratios with the accounting department to ensure the calculation is aligned with your organization.


Gina Valentino is the owner of Hemisphere Marketing (www.hemispheremarketing.com).

EXAMPLE: Marketing Scorecard
Customers YTD (LY) YTD Change
First-time buyers 4,000 4,100 -2.4%
12 mo. buyers 51,000 50,000 2.0%
12 mo. buyers w/e-mail 20,400 20,000 2.0%
1x buyers 11,730 12,500 -6.2%
2x+ buyers 39,270 37,500 4.7%
12 mo. catalog requests 2,500 2,625 -4.8%
12 mo. credit card users 9,180 9,000 2.0%
12 mo. widget buyers 15,300 14,500 5.5%
Retail
Free gift coupon redeemed 8,000 9,200 -13.0%
Sweepstakes sign-up 10,000 10,500 -4.8%
Buy one get one free coupon 5,000 4,500 11.1%
Internet
Number of visitors 500,000 450,000 11.1%
Conversion to buyer rate 3.8% 3.7% 2.7%
Abandon rate 57.0% 58.0% -1.7%
Simple Catalog P/L Dollars Ratio
GDS $120,000
Less cancels $2,400 2.00% to GDS
Shipped sales $117,600
Less returns $17,600 14.67% to GDS
Net sales $100,000
Cost of goods $40,000 40.00% to net sales
Gross margin $60,000 60.00% to net sales
Advertising $30,000 25.00% to GDS
Contribution margin $30,000 30.00% to net sales
Fulfillment $13,000 13.00% to net sales
G&A $10,000 10.00% to net sales
EBIT $7,000 7.00% to net sales
[a] Number of customers acquired 1,000
[b] Annual rebuy rate for a new buyer 40%
[c] Avg order value for a 12-mo.-buyer $99
[d] Gross margin percentage 60%
[e] Fulfillment expense percentage 13%
[f] Total in the mail cost (unit cost) $0.65
[g] Number of mailings per year 7