Gary Hennerberg's Four-part Series on Marketing Costs
CALCULATING ALLOWABLE MARKETING COSTS
By Gary Hennerberg
You need to know how much you can reasonably spend to acquire a new customer, and what level of response you will receive from your marketing program. In other words, you need to calculate your allowable marketing cost.
In its simplest terms, imagine a dollar bill that represents a sales dollar, then allocate percentages of your sales dollar for costs of doing business. Broad categories include:
- Cost of Goods or Service.(COGS) This is usually a fixed cost of your product or service. You can't do much to change this cost.
- Fulfillment. Order entry, processing, pick/pack, shipping, labor, cartons and postage are also all fixed costs.
- Overhead. Your cost to do business: salaries, rent, etc. Again, this cost is usually fixed.
- Pretax Profit. Set your objective in advance of marketing, probably as a percent of sales.
- Marketing Investment. What's left over of the dollar is what you can invest on a percentage-of sales-basis for marketing.
In this scenario, your costs of COGS, delivery/fulfillment and overhead are fixed. There is not much you can do about these costs. Your variable items are profit and marketing. Spend too much on marketing and your profit erodes. Allocate too much to profit, and you may not have enough for marketing to deliver your profit. Here's an example:
Average Order: $100.00
COGS: $ 40.00
Fulfillment: $ 15.00
Overhead: $ 15.00
Profit Objective: $ 20.00
Total Costs: $ 90.00
Allowable Marketing Cost: $ 10.00
If you are using direct mail or a catalog, and the cost to mail is $600 per thousand, you need to generate 60 orders per thousand to make your numbers, or a 6 percent response rate. That's considered high. Your challenge will now be to adjust your costs and expectations. Often, when acquiring new customers you can justify no profit since your profit will come from established customers. If that's the case, your allowable marketing cost using the example above could increase to $30.00 ($20 formerly allocated to profit plus the original $10 allocated to marketing). With a $30.00 allowable marketing cots, your required response rate drops to 20 orders per thousand, or a 2 percent response rate. That might be more reasonable.
Reinventing Direct is for the direct marketer seeking guidance in the evolving world of online marketing. Gary Hennerberg is a mind code marketing strategist, based on the template from his new book, "Crack the Customer Mind Code." He is recognized as a leading direct marketing consultant and copywriter. He weaves in how to identify a unique selling proposition to position, or reposition, products and services using online and offline marketing approaches, and copywriting sales techniques. He is sought-after for his integration of direct mail, catalogs, email marketing, websites, content marketing, search marketing, retargeting and more. His identification of USPs and copywriting for clients has resulted in sales increases of 15 percent, 35 percent, and even as high as 60 percent. Today he integrates both online and offline media strategies, and proven copywriting techniques, to get clients results. Email him or follow Gary on LinkedIn. Co-authoring this blog is Perry Alexander of ACM Initiatives. Follow Perry on LinkedIn.