Marketing Strategy By The Numbers: Determining Breakeven Allowable & Marketing Allowable

When you first sit down with a client for a brainstorm they will often start the meeting by discussing the creative possibilities: “What do you think the marketing vehicle should look like?” “I have a great idea for a headline!” “Should we design a postcard or a solo with a full-color brochure?”

Let’s face it. Clients love getting involved in the creative process – it’s fun and exciting. But in the world of direct response the real creativity happens when a client gives us a budget and we figure out what we can afford to spend, and how we can get the most from that budget. For this reason it’s important that you guide your clients through the creative process and manage their input.

So the next time your client jumps headlong into the creative development process take a moment to suggest that you first determine how much you can spend to acquire a customer.

Gross Revenue

Let’s say your client is marketing wacky widgets and the selling price is $49.95. They charge an additional $4.95 for shipping and handling. So the gross revenue per order is $54.90.

Costs

Product cost for a wacky widget: ……………………………………………………………………………………… $9.50

Credit card processing fee:………………………………………………………………………………………………… $1.32
(3% card processing fee with 80% of orders using credit cards: 80% of 3% of $54.90)

Toll-free number:………………………………………………………………………………………………………………. $1.60
($2 per call with 80% of orders coming via telephone: 80% of $2)

Bad debt:…………………………………………………………………………………………………………………………… $1.10
(2% of $54.90)

Returns: …………………………………………………………………………………………………………………………….. $2.75
(5% of $54.90)

Fulfillment cost:………………………………………………………………………………………………………………… $3.00

Shipping cost: …………………………………………………………………………………………………………………… $3.95

Total cost:………………………………………………………………………………………………………………………….. $23.22

Calculating the breakeven allowable and marketing allowable

To find your breakeven allowable take the gross revenue per order and subtract the cost per order: $54.90 – $23.22 = $31.68.

Breakeven allowable is fine to work with but you also want to work in profit. Let’s assume a profit of 30% on product cost: 30% of $9.50 = $2.85

For our purposes we’ll treat that as a cost. So take your gross revenue per order and subtract the cost per order and the profit: $54.90 – ($23.22 + $2.85) = $28.83.

In this example our breakeven allowable is $31.68 and our marketing allowable is $28.83.

I’m not an accountant – what does that mean to me?

For one thing, you can figure out what kind of response you need to achieve. If you have a marketing budget of $100,000 you would need:

$100,000  =  3,157 orders to breakeven
$31.68

$100,000  =  3,469 orders to hit your profit target
$28.83

If you past campaign performance tells you to expect a 2% response rate, then you must mail:

3,157 x 100  =  157,850 pieces
                2

Your cost per thousand (CPM): 100,000 divided by 157.85 = $633 per thousand

3,469 x 100  =  173,450 pieces
                2

Your cost per thousand (CPM): $100,000 divided by $173.45 = $576 per thousand which is still achievable.

So for this example, we know that to make a profit we’ll need to get 3,469 orders. To get this number of orders, assuming a 2% response rate, we’ll need to send 173,450 pieces. To stay within our budget of $100,000 we’ll need to develop and mail a package at a cost of less than $576 per thousand or $0.57 per piece.

Now that you know the allowable you can begin to develop cost-effective strategies. Of course this is a quick-and dirty analysis (remember we’re still not accountants). To do it thoroughly is more complicated. You’ll want to factor in multiple sales, repeat orders, referral orders, list rental, database costs, etc. But doing this one simple exercise will let you know what ballpark you’re in.