Sunday, February 1, 2009

Metric Monday – How Much is that Marketing Effort Worth?

The scenario is common – you’re in a meeting with the communications committee and someone suggests that your organization needs a brochure. Lots of ideas are shared about the size, how big, how many, and where it could be distributed. But very little of the conversation surrounds what you want to receive back from that brochure. In other words, what is that piece supposed to do for you in terms of contributing to your organization’s top or bottom line revenues? In today’s edition of Metric Monday I am going to suggest how you can determine if your marketing activities are negatively or positively contributing to your finances. Break-Even Analysis, and Contribution Analysis are two metrics you can use for this purpose.

(Important Reminder: variable costs could be the cost of goods sold, shipping/delivery charges, costs of direct materials or supplies, and/or wages of part-time or temporary employees. Fixed costs remain the same regardless of your level of sales such as rent, equipment expenses, and salary of permanent full-time workers.)

The break-even level is basically the dollar amount – in either donations generated, registrations sold, memberships acquired, etc – that is required to cover the total costs (both fixed and variable) of the marketing effort. Your profit at the break-even level is zero. The equation looks like this: Total Costs = Total Revenue.

Now, if your prices are higher than your variable costs, then revenue generated contributes to covering some portion of the fixed costs. This is a contribution level. So, your contribution can be calculated as the difference between unit revenue and unit variable costs. When you’ve generated enough contribution to cover all your fixed costs, then you have a true break-even scenario. Of course, any revenues generated that go beyond the break-even scenario is profit.

Okay, now that we have these basic financial concepts in mind, let’s go back to the idea behind the brochure. Again, the first question you have to ask yourself is what do you want to receive back from that brochure? What is it supposed to do for you? More often than not, committee members will say it will help to generate awareness. So then you have the difficult task of assigning a dollar amount to what awareness means to your bottom line. For this basic reason, I typically suggest organizations do NOT make a brochure just to have one. Assign a specific, quantifiable purpose to it – a goal that can be measured against. That’s the only way to know if you’re efforts are contributing to your organization’s value.

Practical Scenario: Let’s figure that you want to do a brochure to generate registrations for your conference. To identify the benefit of that brochure you first need to know how much each registration sells for (e.g. $300). Next you need to know the fixed costs to your organization to put on the conference – basically your own organization’s staff, equipment, etc. Let’s say that is $12,500. You also need to know the variable costs to your organization for things like confernece room rentals, meals, badges, speaker fees, etc. Let’s say they are $210). That means you have a contribution per registraiton of $90 ($300-$210=$90).

To figure out your break-even volume you divide the contribution per registration into the fixed costs ($12,500/$90). In this scenario you need to generate 139 registrations. As your variable costs change you recalculate the formula to identify how many registrations you need to cover your fixed costs and achieve a break-even point. If your brochure is more expensive and adds an extra $5 per registration to your variable costs making them now $215, you’ll see you now have to generate 147 registrations to break even. If you need to make a profit on your conference of $5,000, you can calcuate that you now need to generate 205 registrations (I figure this by simply adding the profit requirement into the fixed costs forcing it to be a positive return to the organization).

Bottom Line: Marketers spend way too much of their time just making brochures and doing marketing without fully understanding the goals and impact of their activities upon the finances of the organization. By approaching your marketing activities with a financial perspective you force clarity around what marketing is supposed to be achieving, identify measurable goals, and ensure you’re getting the most value from your efforts.

If your organization is using break-even or contribution analysis I’d love to hear how its working for you. What challenges have you faced in going through this process? What has happened as a result of adding a financial perspective to your marketing?

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