When laying out a marketing strategy for a new client, I always ask what their average sale is, and what their profit margin is. A surprising number ask, “Why is that important?” Here’s why:
How much you can spend to acquire a new customer and still break even is determined by your average sale, your profit margin, and your marketing cost. After calculating your breakeven point, we can then judge whether any given marketing effort has a reasonable chance of succeeding financially. For instance:
Let’s say that you sell a widget for $25, and your gross profit margin – your sales price less cost of goods – is $15.
The widget is easy to describe, so a simple postcard should give you enough space to explain the features and benefits adequately.
So you decide to send a postcard to 10,000 prospects, at a price of $0.50 each. That’s $5,000 in marketing costs.
What’s your breakeven point? Divide your marketing costs ($5,000) by your gross profit margin ($15) and you have the number of widgets you need to sell to break even (333). You won’t make a cent profit until you sell more than that. Is that a reasonable expectation?
Divide those 333 widgets by the 10,000 postcards you’re mailing, and that tells you need a 3.33% response rate just to break even. Experience tells us that’s highly unlikely; you’re better off throwing that idea out the window and considering something else.
So, when I ask for your average sale and profit margin, I’m not being nosey. Those numbers are vital for determining which marketing strategy offers the best chance of succeeding.