How To Prevent Costs from Ruining Your Profits?

Are you stuck with rising costs?

Are you facing the issue of your costs constantly ruining your profits?

Are you having erratic business volumes that you have no control over?

In business, majority of businesses that stagnate have no problem with getting money flowing in. It is the outflow that gives rise to issues.

Salaries, machinery, equipment and resources can eat away at profits before you know it.

Additionally, it is not only how much that flows out of the company that is worthy of concern.

The invention of computers and the World Wide Web has given marketers new frontiers to reaching customers online. With consumers accessing the web on their smartphones, tablets, and laptops, digital marketing has become an integral part of every business’ marketing strategy.

However, companies should remain aware of how much value they are obtaining for each dollar that they spend, especially on marketing campaigns. For companies to understand their costs – both explicit and inherent costs – and profits properly, an understanding of ROI and KPI is crucial.

Discovering Your ROI – How Much Are You Getting Back?

Return on investment (ROI) is an important part of digital marketing, as it is with any other marketing campaigns. It is responsible for informing you if you are getting your money’s worth from your marketing campaigns.

In the past, companies do not bother creating a system to analyse the progress and results of their marketing efforts. No system is capable of capturing the full picture. If sales went up, companies would usually see that as a sign that their marketing efforts require no changes or improvements. Conversely, when sales dropped, marketing managers would stop what they were doing and try something else instead.

Today’s marketers can measure how effective a current campaign is doing in addition to the campaign’s return on investment.

The basic ROI calculation can be obtained from:

ROI = (Net Profit/Total Cost)*100

What is a Good ROI?

The definition of a good ROI would really depend on your company’s expectations and goals of the marketing campaign.

Was the campaign used to raise brand awareness?

Did you manage to recuperate the costs of the marketing campaign?

What was the profit/loss margin?

Apart from setting realistic goals and expectations, companies have to match the correct ROI to the intended goal.

  • For example, brand awareness should be measured by proxy in terms of website views or social media awareness.
  • The success of marketing campaigns should be reflected from your landing pages statistics.
  • Your email marketing campaign should be measured by the open and click rate to better understand your email header and email content success rate respectively.

How Important is ROI?

Businesses that sell products and services will always focus on the most responsive target audience and motivate them to purchase their product or service. After all, you either close the transaction or kickstart a transaction that will form a sustainable and recurring relationship between you and the client.

These processes are key to maintaining your business.

While some businessmen deliberately avoid spending on marketing after noticing a downward shift, others may pour more money into old activities without accounting for their ROI. Instead of calculating the cost of an activity, it is vital to calculate their profit center, or whether it is worth an investment.

When you cut back on marketing in response to a declining market, you are actually decreasing your investment in business growth, which will end up creating a downward spiral. Oftentimes, companies depend on activities that seemingly generate revenue to compensate for their initial costs. However, these companies often fail to measure how well their marketing activities are performing, which leads to a loss.

If you can evaluate each activity while keeping your goal of sustaining and growing your business, you will be able to make full use of assets that you have already invested in without having to outsource it or downsize your resources. These activities may become assets that you can leverage on for joint ventures in the future.

How to Achieve a Better ROI?

Here are a few tips to help with achieving a better ROI:

  1. Save on capital expenditure. If you are buying a product, try negotiating for the lowest price possible, then have the seller accept a part of the price in the form of your product or service. This helps to lower the cost of what you are buying, especially when the seller probably will not use your service or product immediately.

    Having a barter trade of products and services could also open doors for you to build partnerships and joint ventures. Collaborations and sponsorships could help you propel your marketing campaigns while keeping your marketing costs low.
  • Employ a unique currency system. With your own established form of currency, costs can be based off the cost of your supply and services so that someone without actual cash can still pay for it in another way. If you do not have what your business partner wants, you may have to trade your product or service with a third party instead.

  • Finance growth without the use of capital. If you are innovative enough, you can get started with virtually nothing. This can be done in many ways. The first is through leverage. Capital leverage involves using debt to finance your ventures. If done properly, the returns could bring you capital gains and you would have ended up not needing a single cent from your own pocket. Another is through joint-ventures and partnerships. Having investors or partners could help to lower your costs significantly, as you enjoy greater cost savings and distribution channels through partnerships.

Finding Out What Has Been Done – Focusing More on KPI

Apart from finding out what you have achieved in return, you should also find out what has been done for every dollar that you have spent.

For smaller companies which are looking to expand rather their market share, rather than earn a profit from their customers, it would be better to focus more on KPI rather than ROI. KPI refers to key performance indexes, which can also be used to signal the success rate of a marketing campaign.

The goal of marketing is to increase sales, which are often represented by revenue and ROI. However, when you focus entirely on ROI, you only get to witness a smaller aspect of the bigger digital marketing picture. Your KPIs play important roles as well.

While many KPI may end up having no direct correlation to your ROI, there is often a pattern to be found between the two.

For example, if your KPIs includes a heightened click-through rate, you may also start to notice an improvement in your marketing ROI. This is because visitors that arrive on your web page though a free organic search will end up reducing your cost-per-visitor, giving you a picture of lowered acquisition costs.

On paper, your ROI improves.

KPI numbers might not be useful individually but are good numbers to interpret to give you a better picture of your ROI.

What KPI metrics Should You Consider

Below are common KPIs to consider:

  1. Unique Monthly Visitors – This metric allows you to know how many unique sources clicked through to your website in a month. For more specific data, this metric can be further divided by traffic sources (from your various marketing channels), demographic and search intent. You can even track the average time they spend on your website to have an understanding on your website’s impression.
  2. Cost Per Click – This metric is usually automatically calculated. It shows how much it costs to get each lead.
  3. Cost Per Acquisition – Divides your total marketing spend by the number of acquired customers. It gives you a better picture of how much a new customers costs in marketing dollars.
  4. Average Order Value (AOV) – This metric lets you know the value of each customer’s purchase – how much they spend on average – each time they purchase. Apart from number of customers, paying attention to average sales volume is important for businesses offering services, especially b2b companies.
  5. Customer Lifetime Value (LTV) – The customer lifetime value answers how valuable are your customers. You would want this value to be lower than your acquisition costs, for your marketing campaigns to make financial sense.
  6. Lead-to-Close Ratio – The lead-to-close ratio is calculated by dividing the number leads by the number of leads that were closed. This ratio informs you of the quality of the leads your marketing campaign is able to procure.

Understand Your Profits and Losses Using ROI and KPI

At an organizational level, calculating marketing return on investment can help guide business decisions and optimise marketing efforts. For marketers, understanding the ROI generated by campaign helps:

Justify Your Marketing Budget

In order to secure budget and resources for future campaigns, it’s crucial that current spending can be justified. To do so, marketers need to accurately calculate the ROI their marketing efforts are delivering. This allows for better resource allocation.

Across online and offline channels, there is a myriad of possible marketing combinations. Campaigns would require funding. But knowing which campaign is bringing in the best results would help companies manage their marketing budget better.

Measure The Campaign’s Success

A successful marketing team would need to measure campaign success and establish baselines that can serve as a reference for future efforts. Measuring ROI consistently allows companies to establish baselines to gauge their success and adjust efforts in order to maximize impact.

By understanding the impact of individual campaigns on overall revenue growth, marketers can better understand the right combination of offline and online campaign efforts.

Campaigns focused on driving long-term goals such as customer relationships, brand awareness, social awareness and customer retention might not have suitable metrics to gauge their success. It is important to align success metrics with the overall goal and duration of a given campaign, but some efforts may require a longer timeframe to understand the success behind the marketing efforts.

ROI’s role and usefulness may be clear and simple. However, in-depth measurement of ROI may be complexed and layered. In order to evaluate a better picture of marketing ROI, there are many factors to consider.

ROI measurements should account for external factors that impact campaign success, including weather, seasonal trends, events, and timeframe. ROI measurements also need to account for intangible costs, such as opportunity, man hours and worker’s productivity, all of which may be hard to capture in numbers. However, when all else fails, it is good to use an unbiased approach to analyse the campaign’s success and worthwhile.

Ultimately, while tracking metrics and indexes helps give you an objective view of the matter, some results cannot be captured among tangible numbers.

Do a Competitive Analysis on Your Rivals

Companies need to not only track their own ROI but also the ROI of competitors. This will allow them to understand how the industry is performing as a result.

Tracking publicly available information to estimate the ROI of competitors can also help adjust marketing baselines to better reflect the estimates. These efforts are all to keep a company competitive in the market.

Tracking the marketing ROI of competitors allows marketers to accurately understand how their organization is performing within their specific industry. For example, marketers tracking publicly available financial data can estimate the ROI of competitors and adjust baselines to reflect these estimates—helping to keep efforts consistently competitive.

Today’s campaigns are also not limited to a specific channel. Campaigns across channels may also affect ROI.  Leveraging aggregate measurements like media mix models will not provide the granular insights marketers need. If it takes multiple touchpoints for a consumer to reach a purchasing decision, measuring ROI would also have to consider the offline and online touchpoints of a consumer.

Tips to Manage Profits and Costs


Strike the Right Balance

Companies need to strike the right balance between spending too little and spending too much.

When a business struggles, often times, the problem is either that you are spending too much or too little. Companies usually spend too much when they fail to calculate and establish expectations regarding ROI or when they are unable to maximise performance for revenue.

When it comes to spending too little, most of the time, this means that the employees are not providing their best service.

These issues can be solved relatively readily. Firstly, you can modify the way that employees are compensated by having a system wherein their success is proportionately linked to your business’ performance. If the business profits fall, so does the employee’s compensation.

Offering these kinds of positive incentives to your employees can help to decrease your expenses while ensuring that the more you pay, the more the business sells.

When it comes to spending too much,


Establish Clear Objectives and Goals

There can be more to a campaign than just ROI, such as changing brand perception or building brand loyalty. It is crucial for marketers to establish clear goals that indicate what external factors can affect their ROI, as well as how these unique factors can be measured or ignored.

Otherwise, focusing on the wrong factors and overcompensating your campaign’s efforts to meet those goals would result in overspending and wasting resources. Consider leveraging proxy measurements like brand awareness strategy surveys, social platform engagements, sales volume and unlinked brand mentions.

Develop A Unique Packing For Your Product

When it comes to poor profits, a problem could be not selling enough.

Selling your product and services is no easy task. You need proper marketing to help with it. However, one rule that survives all industries and across all consumers is that your product should be uniquely yours.

You need to set yourself apart from the competition and package your product as a unique option to consumers. Packaging your product as proprietary can help increase its value. Many businesses are faced with ‘parity pricing’, where all competitors charge the same and costs remain frozen. To absolve this problem, simply make an offer that is so unique and different that clients will automatically turn to you.

If you are unable to reduce monetary costs, provide more value to your prospects. This could help you sell more.

Expand Your Horizons – Embark on Joint Ventures

Great things in business are never done by a single superhero.

Creating an alliance with another business can help with your cost and profit margins. You can capitalise on it with little to no risk and the best way to keep your costs from swallowing your profits is to remove the need for investments at an initial stage where the company would appreciate a better cash flow.

If your company is limited in funds and resources, it is essential that you scale your ROI horizon accordingly to avoid running out of cash. Having a partner to work with helps with lowering your costs, as you get to reap the benefits of economies of scale.  Knowing how to manipulate your cash flow so that the correct amount flows in and out every month is key to maintaining your business.

Take. small steps to the horizon that is your business is a key baby step.

Conclusion

Utilise the right marketing measurements and profit-cost model to track your progress. Some costs might not be captured in words and numbers, similar to how returns can be intangible, in the form of brand building, reputation and word-of-mouth.

Clearer insights of your costs and profits can help with best utilising your resources.

As with any other business strategies, the key is to make every resource you have work the best and most for you.