It is a common misconception of new
entrepreneurs that the response rate to a marketing campaign
(also known as a capture ratio) is indicative of profit.
Profitability is only loosely tied to response rate. The
costs of operation and overhead, along with the response rate
(number of sales) those relate to the price per sale is what
will finally determine profitability. The term Return on
Investment (ROI) is the performance measure that evaluates the
effectiveness of an investment.
RO! = The Gain from an
Investment - Cost of the Investment / (divided by) the
Cost of the Investment
If you sell 100 cat toys for $10.00
each the gain is: $1,000
If it costs $7.00 to sell each cat
toy the cost is:
700
After deducting the costs of sale,
your net earning is: $300
THE ROI:
$300/$700= You have received a 43% return on
your investment.
In order to see a true return on
investment figure, it is necessary to factor all costs related
to the marketing and delivery of the product into the costs.
Methods of calculating ROI range
from very simple, as in the example above, to more complex, as
factors like number of responses to a direct mail marketing
campaign vs. the actual number of responses that turn into sales
(conversions) are factored in.
It easy easy to see from the
calculation of ROI that the both the sales price and the costs
involved in making the sale, impact the bottom line and
determine the final success. The number of sales that are
made is not nearly as important as the relationship between
costs incurred in making a sale vs. the sales price that buyers
pay.
This is one of the reasons that
BuyBusinessData.com recommends keeping expenses for a direct
mail or e-mail campaign as low as possible. Our
recommendation:
1. Begin with a strategic plan for
marketing.
2. Keep costs low.
3. Develop performance
expectations.
4. Launch a targeted marketing campaign.
5. Test various
marketing materials and media.
6. Tracking return on investment.
Once you have
successfully implemented a marketing campaign and achieved a
satisfactory return on investment, in order to continue to grow
successfully, it is a simple matter of
scale, reinvesting profit into an expansion of the proven
marketing campaign.
