The ultimate goal in any company…
…is to acquire AND retain customers where costs to acquire and retain are less than expenses, which leads to profits.
Boiled down to this single statement, then the most important variable in the finances is the marketing spend.
Even if your other expenses are high or way out of whack or your conversion is terrible and you can profitably acquire and retain customers, then those other expenses matter a lot less.
So, how do we know how well our marketing is working? We use the model in this post, which is a high level marketing campaign model that aggregates all the detailed costs into a few key components.
This model is probably the most important model in my arsenal and the one I use the most. It flows like a profit and loss statement with key ratios to help me quickly see how I am doing in a particular marketing or sales campaign.
Actually, this model is a more simplified version that I use, but for a very high level view, this one works great and useful to explain in this post.
How it works is rather simple. Let’s dive in.
Marketing campaign goal metrics model
To download the spreadsheet used in this post, please scroll to the end.
This variable I set as my gross income that I want. Actually, it might be the last thing I set because I generally start with my net income and net margin goals and work backwards by putting in the variable that will get me there.
Excel’s or Sheet’s goal seek and goal seeker, respectively, are useful here, or you can interpolate by hand.
COGS (Cost of goods sold)
I always try to determine my COGS based on a given revenue range and a particular marketing channel and convert to a percentage of revenue, which makes it easy for the model to use when the other variables change.
The key here is to understand your costs for a given channel and product that you are promoting in the marketing campaign.
This is very important because marketing costs can vary dramatically for different channels and products.
Don’t mix them together.
This means you want to have a really good accounting general ledger and system to be able to track expenses down to the product and the channel.
I always like to look at my marketing fixed costs because they can vary quite dramatically by channel and product, so they go in this line item.
But the one variable in this whole model that I will constantly adjust based on my ad spend is the ad spend line item.
I highlighted it in blue because when I set all other variables, I find this one will continue to change the most.
This is all other costs for the business, and I mean all other fixed costs. Just lump them all into this variable.
There will be other variable costs, like product returns, but I generally just try to lump them into this line item based on the revenue range to keep the model simple.
Other P&L line items of net and profit margin are pretty simple to understand.
I always try to start with my goal net profit margin, then work backwards from there to fill in all other variables in the model.
My net profit margin goal is usually 30%.
Return on ad spend is important because it helps me compare one campaign to the next.
Do comparison only for each marketing campaign within a specific channel and by product. Don’t use it to compare across different products and channels because it is not an apples-to-apples comparison.
In general, I look to be in a range for ROAS:
- 2-4 is generally the range for breakeven for a consumer product business. If I am above that and at or below my breakeven net income, then I may need to try and work on getting my operating costs down to get it in line.
- 7 or above for a profitable business via digital marketing usually means I have a great performing campaign. That number is 3 or more for an analog marketing campaign.
My traffic line items specifically break down the performance for each step in my funnel through purchase.
Those performance ratios should be in line with my category.
My goal is to improve those ratios by playing with my funnel and each step in it to get better conversion.
Average Order Value
And finally, I have my average order value, which rolls up to revenue.
Key things to focus on
There is a lot going on in this simple model with all the variables you can input, but to keep it simple, here are the key things to focus on:
- Ad spend: the goal is to drive this one down, which means finding a marketing channel where the costs are cheaper over other channels (you have good marketing arbitrage).
- Traffic: improve these numbers by working on your funnel to get customers to convert better in each step.
- COGS and Operations: reduce these costs so that those savings flow to your net.
- Average Order Value: get this number up so that fewer customers will do the job for you, which then means your traffic numbers do not need to perform as well.
This model can technically be used anywhere, even with reseller or retailers. The ad spend is any cost you pay to acquire customers.
For a reseller or retailer, that is not just the tradespend but also the margin you give to them to resell your product. Margin you give up is an acquisition cost, so I consider it a marketing expense.
When you look at it this way, the 65% margin that a retailer in a specialty channel is charging to resell your product becomes a huge expense.
But that is the way you want to look at it because if you can acquire customers for less in other channels (and you usually can), then you might want to focus efforts there.
Paying that 65% margin usually only starts to make sense when you can sell a lot of volume to get economies of scale, which takes time and cash to get to that point.
This model rolls up key performance indicator (KPI’s) for a consumer product company.
As long as you have robust and thorough data and accounting tracking systems in place, then it becomes quite easy to use this model to figure out what is working in your business.
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