Data Driven: Planning for Profitability
In this scenario, the 10% B/E is calculated identically to the 0 percent example, except Fixed Costs (represented as 10 percent of Net Revenue) is added in to the equation; Pre-Tax Profit Contribution adds Net Revenue (+) to Variable Costs (-) and Fixed Costs (-).
20% B/E Example
The final column of the B/E analysis chart includes any pre-tax profit contribution goals your company requires. In this case, an additional 10 percent profit goal is built into the equation (contribution + 10 percent fixed + 10 percent profit goal). This is quite effective when measuring an overall campaign strategy.
The 20% B/E example is also calculated the same as the 0 percent example, except Fixed Costs and a 10 percent profit hurdle are added in to the equation; Pre-Tax Profit Contribution adds Net Revenue (+) to Variable Costs (-), Fixed Costs (-) and Profit Target (-).
We now know what minimum response rates and revenue targets per advertising piece need to be to help us plan the contact strategy. The B/E analysis is also a perfect application for "what-if" observations; for example, what if the Average Transactional Value were $120 or $140?
Of course, there are nuances that can be applied to the B/E analysis. Building upon the last column's Lifetime Value analysis (LTV), if you are measuring an individual prospecting segment and have calculated that prospecting list's LTV, then you add the individual client's cumulative LTV to the Average Transactional Value. In the 0 percent column from the B/E chart, adding in a $20, 3-year cumulative LTV factor lowers the B/E percent needed to 0.65 percent.
The B/E analysis is equally adept at measuring online campaigns. The major difference is in the advertising cost. An email effort is more likely to be $0.05, rather than the $0.50 listed in the chart. Your B/E is therefore considerably lower (of course, so is your response rate and average transactional value), allowing you to communicate with potential clients for pennies.