Micro-Channel Profitability
Don Libey asks the following question (of more than a hundred) in his February Multichannel Advisor newsletter:
- Has anyone shown me the actual, proven profitability for pay-per-click, affiliates, adwords, social media, and all the other micro-stuff? Is it accounted for in the same way as catalogs or any other marketing effort? Is it accurate? How do I know that?
Maybe I've always been wrong.
Take your average $50,000,000 online/catalog brand. Assume that it costs about 4% of net sales to keep the wheels on the website --- servers, bandwidth, widgets, web analytics tools, commissions to 3rd party vendors for each sale, IT staff, programming code for new applications, inventory system alignment across channels, you name it.
4% of $50,000,000 is $2,000,000.
Finally, assume you have 12,000,000 annual website visitors.
One could make an argument that each visit to the website costs $2,000,000 / 12,000,000 = $0.167.
Imagine adding $0.167 to every paid search visitor. Or to every organic search visitor? Or every visitor who randomly visits from Twitter? Here's a paid search example:
Current | With Fixed | |
Clicks | 5,000 | 5,000 |
Conversion Rate | 2.1% | 2.1% |
# of Buyers | 105 | 105 |
AOV | $95.00 | $95.00 |
Demand | $9,975 | $9,975 |
Net Sales | $7,481 | $7,481 |
Gross Margin | $4,115 | $4,115 |
Less Marketing Cost | $2,500 | $2,500 |
Less Est. Fixed Costs | $0 | $835 |
Less Pick/Pack/Ship | $860 | $860 |
Profit | $754 | ($81) |
Profit Per Buyer | $7.18 | ($0.77) |
The most important part of this exercise is to think! I'm not saying one way is right or wrong, but we have a responsibility to consider whether our activities are truly profitable or not --- we need to ask ourselves if some channels get a free ride while others carry too much of the freight.
Labels: Fixed Cost, Variable Cost, Variable Expense
0 Comments:
Post a Comment
Links to this post:
Create a Link
<< Home