If you aren’t figuring your ad expenses correctly then you are misforecasting. You will accrue larger losses or miss out on greater profits…
You risk over-estimating your performance — or under-estimating it. Over-estimating your marketing campaign’s performance produces losses because you are continuing to fund unprofitable investments. The consequences for under-estimating the sales performance of your marketing mean cutting your profits because you are curtailing otherwise profitable sales activities.
Both are incidences of misreading the messages your customers send you by way of their purchase patterns. It is easy to be imprecise in tracking advertising and marketing expenses. This is the path taken by unsuccessful entrepreneurs. This is the wide path. You don’t want to follow this path.
Success means taking the narrow path. Most entrepreneurs don’t do this. You can tell because of the commonly-recited statistic that nine-out-of-ten of all new businesses fail.
So which costs do you need to make sure you factor in? These seven will keep your head above water:
- Cost per inquiry
- Conversion percentage — how many inquiries convert into sales? Many businesses don’t know how to track the response and conversion rates of their advertising campaigns.
- Cost per sale — more commonly COGS (Cost of goods sold) or Cost of Fees
- Follow-up expenses — Do you follow up a lead with a phone call from a salesperson? Or do you send a piece of literature or a sample? If so, how much do these gestures cost you?
- Overhead expenses — secretaries, administrative personnel, utility costs, etc.
- Percentage of collection loss — what percentage of your goods or services do you deliver but never receive payment for due to any number of reasons?
- Cost of returns — though rare for products that offer supreme value compared to their cost, sometimes your customers will take you up on your iron-clad guarantee. Don’t forget to factor these expenses into your advertising costs. Don’t forget the peripheral costs, such as shipping and processing.
You can choose just how sharply you wish to sharpen your pencil, of course. If you are just starting out, you may wish to make conservative assumptions for some of these costs to simplify the time you spend, especially if you don’t have or can’t yet afford to hire a bookkeeper. Just don’t forget that the more accurate the data you keep the more informed of a decision you can make.
Just knowing how to track response rates alone will put you several yards ahead of your competition. Something is better than nothing, and accuracy trumps imprecision.
The narrow path is more painful, but it is also more profitable.