Higher Profits Through Testing of Every Variable


zero point three equals two times

Zero point three equals two times

Pretend with me you’ve been conducting a direct mail campaign.

In testing your headline you’ve discovered that changing its focus from greed to fear increases the response rate from 1.5% to 1.85%.

Not bad. Three-tenths of a percent. That’s enough to get marketers excited.

You’re kidding,” I can almost hear you say. “People get excited about a tiny fraction of better response?

Well, yes. Yes, they do. You see, that tiny fraction amounts to a 23.3% improvement in top line sales. It has an even bigger impact on the bottom line.

First, Run the Numbers

For the sake of this example, let’s assume the following:

Your selling price is $74.95, and your gross margin is 65%.

The cost of printing your single-page, one color letter and its envelope, folding, stuffing, and addressing is $0.33 per piece.
The cost of postage (bulk mail) is $0.21 per letter.
You’re paying a list broker $40 per 1,000 names (4 cents each).

Add these individual sums, and the cost of promotion becomes $0.58 per lead.

You mailed 10,000 pieces with the first headline.

1.5% of the recipients of the letter purchased: a total of 150 sales. Each sale produced revenue of $74.95, for a total of $11,243.

You’re working with a 65% margin. Therefore, your gross profit is $7,308.

It cost $5,800 ($0.58 per lead times 10,000 leads) to make those 150 sales, which makes your net profit on this mailing $1,508.

Then You Tested Your New Headline.

You mailed 10,000 more pieces with the second headline.

This time, 1.85% of the recipients of your letter bought: a total of 185 sales.  (This is the three tenths sales lift we mentioned).

Each sale produced revenue of $74.95, for a total of $13,866.

You’re still working with a 65% margin, which makes your gross profit is $9,013.

The cost of promotion is the same $5,800.

Your net profit with the second headline is now $3,213.

When you run the numbers, this new headline has more than doubled your profit.

Wow.

Testing Needs to be Mandatory

This is why you must test at every stage of the persuasion process. (It’s also why you must keep detailed records of your results).

Test your headline, test your offer, test the medium, test the frequency of repetition of your message. Test every variable.

When you find an outcome which works better than what you’ve been doing, make the new way your new standard.  Then start testing against that.

It only makes sense that you use the most attractive bait when you’re fishing for customers.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about creating maximum impact through testing of your marketing? Drop Chuck a note at ChuckMcKay@ChuckMcKayOnLine.com. Or call him at 304-208-7654.

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Danger in the Discount

MP3 Player

Generic MP3 Player

Can you imagine a more idiotic challenge than to see which business can use up it’s investment capital and be forced out of business first?

Its what happens each time a new business opens with no strategy other than to sell at a lower price.

Dropping price doesn’t work. Long term, it never works. And in the short term it can’t create long term customers.

Let’s create a hypothetical example:

John finds a Chinese source for an 8mb off-brand MP3 player, which he can buy in quantity for $10 each. John checks eBay and finds the comparable offerings are priced at $40 each.

Wow,” says John. “Those other sellers are being greedy. I’ll mark mine $30 each and sell a TON of ’em.” He estimates the cost of shipping, discovering it will cost roughly $6. John decides to charge $10 for shipping “and handling.”

Thinking he will quickly sell all 100 units at $20 profit, plus a $4 shipping markup, he’s counting on taking in $2,400, and making a net profit of $1,400.

John invests $1,000 dollars, purchases 100 players, and is now in business. He lists them on eBay for $30, plus $10 shipping and handling.

John is right. There is a demand at that price point. He sells 16 the first day and 17 the second.

On the third day John makes no sales. Worried, he browses eBay to figure out why.

What’s this? This guy “Tom” has the same player listed at $27.  Worried, John drops his price to $25, and sells five more before, again, his sales abruptly stop. He finds Tom’s eBay store is still selling them at $27. Puzzled, he digs a bit deeper and discovers “Bob” now has ’em for only $22.

John ponders. “Well, I’ve made some money on these. I think its time to get out of the MP3 player business.” He drops his price to $15, offers free shipping, and expects to blow out the remainder and retire.

John sells 16 more before his sales again stop. He checks. Tom is reacting to the new competition by selling his players at $11 each.

John cuts price below his cost, and offers his last 27 units at $8.50, plus free shipping. Another 19 are sold before “Andrew” offers the same player for $7.50, and free shipping.

Tired of losing money, John contacts Tom, Bob, and Andrew, and offers his last 27 units to them for $270. None of them take him up on the offer.

John cancels his eBay account, and determines everyone on his Christmas list will get an MP3 player for Christmas.

Shall we calculate John’s profit on this venture?

John's P&L

Ouch!

John could be considered a dabbler. A great many eBay sellers are.

Some, on the other hand operate real businesses. Look at the feedback scores. Nobody gets to thousands of transactions as a dabbler.

People like John are not the folks Dun & Bradstreet speak of when they report 6 out of 10 businesses with 20 employees or less don’t make it past their first year, and 9 out of 10 don’t make it to their 10th anniversary.

Going Out of Business sign

Going Out of Business

D&B goes on to say that only 10 percent of all of the business failures in the US file for bankruptcy. The rest close voluntarily because operating their companies turn out to be way too much work for the meager income they provide.

The biggest cause of insufficient income?

Pricing too low.

Why?  Because all of a new businesses operating costs are higher.

A new businesses can’t BUY inventory at a lower price than the big box stores. It can’t ship at a lower price. And it doesn’t spend enough on advertising to buy in the bulk required to get reduced pricing there, either.

Combine higher operating costs and lower profits with discounted pricing, and you have a situation my friend and colleague, Jeff Sexton, refers to as the “race to the bottom.”

With lower price as your selling strategy, you’re competing with at least eight other ventures already in the process of going out of business.

What’s the Solution?

Raise your prices.

C’mon, McKay,” I hear you asking.  “Just how do you suggest I raise prices in a bad economy when all of my competitors charge so little?

Ah.  Fair question.  We’ll discuss that in a couple of days, as we continue fishing for customers.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about pricing for profit? Drop Chuck a note at ChuckMcKay@ChuckMcKayOnLine.com. Or call him at 304-523-0163.

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Is a Radio Remote Broadcast a Good Investment?

Originally published October 4, 2009

One of the advantages electronic news has over print is the capability to deliver information in real time “live from the scene.” As you might imagine it didn’t take long for this proficiency to migrate from the news department to the sales department, giving birth to the radio “remote broadcast.”

Remotes are traditionally expensive. But as advertising sales remain weak in this economy, advertisers are being offered discounted rates on almost all advertising, including remote broadcasts. And that prompts a critical question: is a radio remote a good investment of advertising dollars?

Like everything else in business, the correct answer is “possibly.”

The problem is there are at least four different people involved in the decisions effecting such a broadcast. Most of the time each has a different objective. Those four people are:

  1. the Manager/Owner of the business,
  2. the Radio Sales Person,
  3. the Radio Program Director, and
  4. the Disc Jockey.

What do each of these people want?

The Manager/Owner wants buyers.

His objective is to sell merchandise in such quantity that he can pay for the advertising and still show additional profit for his efforts.

He believes his store offers value. He believes when large numbers of people hear about his offers, they’ll flock to the store to buy. This is usually expressed as “you get people in the door, and we’ll sell ’em.

The Radio Sales Person translates this instruction.

Get them in the door” becomes, in her mind, “your job is to attract a crowd.”

She will arrange all of the crowd drawing techniques at her disposal. These will include a clearly identified station vehicle in front of the store as an attention-getting device. It will be augmented with banners and sound system.

She’ll provide tee shirts emblazoned with the station logo and other station paraphernalia to give away to listeners who come to the event.

She’ll try to arrange to have clowns, balloons, and face-painting to attract kids, free food to attract their parents, and the ever-popular “register to win” entry box. (The prize will, of course, be provided by the customer).

The Radio Program Director will coordinate.

After determining there are no conflicts on the proposed broadcast date, the Program Director will assign a Disc Jockey as “talent.”

The Program Director’s job is to keep listenership high. She hates remotes, considering them to be interruptions to the programming (music), and potentially harmful to ratings. The Program Director will thus limit the number of reports from the scene, limit the length of each report, and do her best to disguise the reports by running instrumental music under the Disc Jockey’s voice.

The Disc Jockey will be expected to attract a crowd.

Feeling pressure from the Manager/Owner and Radio Salesperson, the Disc Jockey will attempt to bribe listeners. He’ll repeatedly emphasize “C’mon down. We’re having a great time,” and will list all of the free items they could win just for showing up.

A few listeners will be impressed by being close to a celebrity. He’ll be tempted to talk to those people who come to him, rather than introducing himself to other potential customers. Part of this, believe it or not, is shyness.

The results are entirely too predictable.

In order they will be:

  1. Reacting to the offers made during the broadcast, people will come to the event for the free food, the clowns, the balloons. They will register for the prizes. They will then leave without buying anything.
  2. Frustrated by the lack of sales, the Manager/Owner will accuse the Radio Sales Person of bringing the wrong people to his event.
  3. The Sales Person will explain to the Manager/Owner the benefits of branding and name recognition. She’ll explain the positive effects of today’s high-profile advertising might not be immediate, but will definitely impact future sales.Back in the privacy of the radio station she will find fault with the Disc Jockey who spent too much time socializing with fans and not enough persuading them to buy.
  4. Of the four people involved, the Disc Jockey will take the majority of the heat when the outcome is disappointing. He’s not a seller. He’s an entertainer. And even though he feared it might end this way when he agreed to accept the talent fee, he will bitterly resent being held accountable for lack of sales, which he believes are beyond his control.
  5. Oddly, the Program Director has the best grasp of the situation. After listening to the Sales Person’s criticism, will resolve to discourage future remotes as too much hassle. “Next time sell ’em a schedule of ads” will be her recommendation.By doing her best to hide the event from her own listeners, she’s created a self-fulfilling prediction of failure.

Unfortunately, the Disc Jockey did attract the wrong people. When listeners hear words like “fun” and “free” instead of compelling reasons to purchase right now, they react accordingly.

Equally unfortunate is the Sales Person’s claim that future sales will benefit from today’s advertising of an event. Although branding and image building ads do take a while to affect customers, and do frequently work better over time, event advertising is quickly forgotten.

No immediate sales. No future sales. Conclusion? Most remote broadcasts are a waste of money.

Which is why, in general, I don’t recommend them.

However. . .

When done correctly they are powerful marketing tools that provide opportunity for greater sales. And at some of the prices we’re now seeing, this may be an excellent time to consider adding one, or more, to your marketing plan.

In our example the four people involved had mutually contradictory objectives. To have a successful event all four must embrace the same purpose: greater sales during the event. That goal must guide every decision effecting the broadcast.

Here’s how to assure higher remote broadcast ROI.

Mr. Manager/Owner,

… take a step back. Recognize that you are more excited about the things you sell than the public will ever be. Expect them to be less excited about your remote broadcast, too.

Think of it this way: a remote broadcast is not an event. Much like a newscast, it is only coverage of an something newsworthy which is already happening. People want to know the news.

A strong concept works well if promoted in the newspaper, on television, or through direct mail. It doesn’t require creativity of the medium to make up for lack of customer interest. If your event that exciting, continue planning the remote. If not, abandon the idea. There’s no sin in passing up an inexpensive opportunity which won’t benefit your company.

OK. You have a strong concept. Good. Don’t use the station as your only source of publicity. We’re not trying to prove this station can draw a crowd. We’re focused on attracting as many buyers as possible. Buy a newspaper ad or two. Keep those ads customer focused.

The headline should address the primary benefit you’re offering. The body copy should say the things your best salespeople say to customers on your sales floor. Put your logo, as well as that of the station, at the bottom of the ad. If your headline catches people’s attention, and your body copy offers strong reasons to buy, only then will they care who’s making the offer.

Miss Radio Sales Person,

… give your client’s business the benefit of your experience. “Great savings throughout the store” is much too generic and won’t persuade anyone. Make sure all of the parties agree on a message which is both specific and highly beneficial.

Is the proposed remote broadcast the best use of your client’s money? As you know, grocery stores make dozens of offers in a “double truck” two-page newspaper layout. They focus so many reasons to buy into a single space every week because it works. If you believe you could create more sales impact with an intense, highly-focused schedule of recorded ads packed into a single time period, do that instead of the remote. The cost to the advertiser is the same either way. Give him the choice with less risk.

Miss Program Director,

… stop compromising. Either refuse to interrupt your music with talk, or commit to making the talk segments so compelling that your music listeners don’t want to be left out.

Would you refuse to interview the top artists in your format? Of course not. Listeners don’t resent talk. They resent people blathering on about topics that don’t interest them. You, Miss Program Director are uniquely qualified to find the exciting appeals that your listeners will want to learn more about.

Your presentation skills can turn this potentially dull and boring jabber into the most exciting information available on the day of the broadcast. Hype won’t work. You’ve got to dig for genuine value, and then make sure it’s presented in a way that helps your listeners imagine themselves owning what the advertiser sells.

Schedule three reports per hour during the broadcast. Have the Disc Jockey announce his location during the FCC required legal ID. Require your studio talent to plug the event during each music segment. That works out to acknowledging the remote seven times per hour. Just as you wouldn’t allow your station to go a quarter hour without reminding listeners to whom they’re listening, this proposed broadcast will also need that frequency of repetition.

Give your Disc Jockey the latitude to react with his own personality from the scene, but make sure each key point is included in each remote break by scripting a standard beginning and ending.

Here’s the part you’re going to hate: kill the music bed during reports from the scene. We want people to take note that something unusual is going on. Play a quick attention-getting intro (think fanfare) as he’s introduced, and then, other than the Disc Jockey’s voice, let the natural ambiance of the event be the only sound.

Can you commit to promoting this event for maximum advertiser impact? If not, do both the client and your listeners a favor and offer to help create a persuasive advertising campaign for him instead.

Mr. Disc Jockey,

… your role needs to change. You’re no longer being asked to host this broadcast because you’re popular and have fans who are likely to come see you. You’re being asked to use all of the presentation skills you’ve acquired in your career to introduce your listeners to the advertiser’s business.

Why would you do that? Because they will benefit from the resulting relationship. Believe it, or recommend another talent. Use that conviction every time you open the microphone.

Get rid of every cliché in your vocabulary – especially those things which you’ve grown used to saying on similar occasions. Repeating the same old verbiage will only produce the same old results.

Watch for customers leaving the store. People who’ve purchased something are sold on the value of their purchase. If they’re reasonably articulate, invite them to briefly answer a couple of questions during your next break. Tell them what you’ll be asking, and help them to quickly express their reasons for buying. These people have exceptional credibility with other folks listening to your broadcast.

And don’t worry about what the station provides for you to give away. We’re now looking for different responses from different people than you’ve invited to past events. Truthfully, you’ll make more money persuading people to visit the store who don’t care so much about meeting you as they are interested in the client’s offer.

By the way, shaking hands with everyone in the crowd and personally welcoming them builds listener loyalty in a way nothing else can.

Finally, Mr. Manager/Owner . . .

The question was, are remote broadcasts good investments? Normally, no. But with the prices now being offered, maybe.

If you decide to try it, don’t choose a station as your promotional partner because of ratings, or even because of price. Instead, choose a partner committed to getting qualified buyers to your event. You’ll know whether you have the right radio station early in the planning process.

Get the station’s Sales Person, Program Director, and Disc Jockey into a planning meeting. Bluntly ask if the station will commit to the three breaks per hour, plus the legal ID, plus three more mentions by the on-air host. Ask if the station will eliminate any music during reports from the scene. Ask if they are willing to make your broadcast the single most important event on the air.

If they are not willing, call a meeting with a different radio station. If they are, commit your resources and schedule the event.

And remember that media partners who put your needs first have earned a significant part of your non-event advertising budget, too. A willing partner can multiply your impact when you’re fishing for customers.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about remote broadcasts or other event marketing? Drop Chuck a note at ChuckMcKay@ChuckMcKayOnLine.com. Or call him at 304-523-0163.

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Presumed Prospects, Identified Prospects, and Core Customers

Media Choices

Media Choices

Martha was THE media queen at a large, St. Louis based advertising agency in the late 70s. She personally placed several millions of dollars with local media.

The St. Louis radio stations, television stations, newspapers, outdoor companies all came to kneel before her throne and pay homage.

For, you see, the ad budgets she tossed to local media reps as if she was feeding scraps to her pets, could make, or break, a media rep’s sales goal.

And Larry couldn’t get in to see her.

He’d called. Left messages. Sent flowers on her birthday. Arranged madrigal singers to serenade her office during the end-of-year holidays. But, no matter what could not get Martha on the phone, or to pencil him into her appointment book.

Until October of 1972, when Larry had a 15 foot banner made that said: “C’mon, Martha. Give Larry an Appointment. Call 314-228-7xxx.” He hung the banner on the building across the street, so that each time Martha looked out her third floor office window, she saw it.

Martha is an Identified Prospect

When prospects are identified, we have their contact information available.  Instead of sending a letter to “occupant” and hoping someone reads it, we address that offer to a specific person.

Instead of running a 30 second TV ad to reach the whole viewership in hopes enough of those viewers might be interested, we pick up the phone, dial a particular prospect, and ask.

Presumed Prospect:

The prospect goes to her mailbox, and retrieves an envelope from Smiling Ralph’s Auto Emporium addressed to “Occupant,” or maybe “Resident.” The letter says, “Dear Neighbor, its time for Smilin’ Ralph’s Legendary Upgrade Your Ride sale, this Saturday at Smilin’ Ralph’s.”

Identified Prospect:

The prospect goes to her mailbox, and retrieves an envelope from Smilin’ Ralph’s Auto Emporium addressed to her. The letter says, “Dear (prospect’s name), your 2006 Chevy Silverado is worth $15,575 toward the purchase of a new Toyota Tundra 11 Crewmax at Smilin’ Ralph’s.”

The General Public is Too Vast

If Ralph sends letters to the general public, he’s sending them to people who don’t drive; to people who just bought a car; people who will not buy a pickup; people who will not buy any foreign-made vehicle, and people who simply can’t afford one.

The more non-buyers Ralph can remove from the Presumed Prospect list, the greater the percentage of sales which result from offers he presents to those remaining.  This has the effect of driving advertising down cost per sale. All of his advertising becomes more efficient.

So, instead of sending the Occupant letter to everyone in town, Ralph uses some combination of geography, demography, and psychography to eliminate as many non-qualified prospects as is practical.  Its Ralph’s goal to to spend no money to reach people who won’t buy.  Its his hope a significant number of the remaining Presumed Prospects will.

We prefer to know more about our prospects, than less.  We like efficiency.

Like Ralph, we look for similarities in age, income, event attendance, radio listening, magazine subscriptions, and other purchasing habits among our current Core Customers. We systematically eliminate groups of people from our Presumed Prospect listswho don’t match the profile.

Of course, the ultimate in knowing “more” is to have their names, addresses, and previous purchase information.  This moves them from the Presumed Prospect list to the Identified Prospect list.  Getting those people to self identify is the primary function of two-step advertising.

So, Identified Prospects Are Better?

Not better. More efficient.

C'Mon Martha Banner

C'Mon Martha Banner

Larry was willing to pay to hang a banner in Martha’s view because he knew she was a buyer. A big buyer. His risk of spending to reach a non-buyer is zero.

The cost of the banner may make it questionable as a good investment, but the sheer size of the anticipated payoff made this one worth the gamble.  Of course, banners aren’t the only medium.  And they are costly.

Compare the cost of Larry’s banner with the much smaller cost of a local radio ad.  Ah, but radio presents another problem.  To schedule that ad, Larry would have to know which stations Martha listens to, and the time she listens. He needs to know whether she is paying attention, or if she’s chosen that exact minute to return a phone call.

Odds are high Larry won’t pick the right time to schedule his ad.  He’ll hedge his bet by purchasing ads on more radio stations, over greater periods of time, and for several more days.  Maybe Martha will hear one of them.  And unless Martha picks up the phone and calls him, Larry won’t even know when she’s heard it and he can stop paying for additional ads.  Yeah, radio’s an expensive way to reach one single person.

OK.  Larry could rent a billboard and put his message on it. Oh, wait a minute. Which route does Martha take to work? Does she drive, or take the bus?  Will she be more likely to notice the message going to work or coming home.  Larry is right back in the unenviable position of needing to buy a lot of boards, too.

And television?  Larry doesn’t know which television programs she likes or which of those she’ll choose to watch at the time he’s scheduled the ad to run.  Even if he did, can Larry be sure she won’t choose that commercial break as the best time to raid the ‘fridge?  Come to think of it, doesn’t Martha sing in her church choir?  On which night do they rehearse?  Is that the night Larry chose to run his ad?

Newspaper?  Which paper?  Which section?  What size ad?  How many days?  Which days?  Looks like a significant budget for newspaper, should Larry choose it.

Mass Media is a Terribly Inefficient Way to Reach a Single Buyer

But, odds are Martha isn’t the only radio listener / television viewer / outdoor or newspaper reader. She’s likely one of many. How many depends on the station (or location, or circulation), and the time of day (or placement).

How many of those other people may be prospects? Ah. Good question. That sort of brings us back to the basics, and back to the concept of Presumed Prospects, doesn’t it?

As a general observation, the more we know about a shopper / potential buyer, the more it costs to expose that shopper to our message.

This concept is important.  I’m going to repeat it. It always costs more to reach a highly-qualified prospect than one who’s marginally qualified, or not qualified at all.1 But, the more qualified that prospect is, the more likely she is to buy.

So, like nearly everything in advertising, the way to determine the best advertising program for your business is to try a few and compare.  The cost of each ad isn’t really relevant.  Divide the number of dollars resulting from advertising driven sales by the total cost of the advertising.

The Exception

Cash Register Receipt

Cash Register Receipt

We know far more about existing customers than about any Presumed Prospects or Identified Prospects. Well, we should.

People who’ve already bought are most likely to do so again.  Since you already know each customer’s name, her address (or e-mail address) and what she bought, you can craft an individualized offer and deliver it for the price of a stamp.2 (You do know this information, don’t you)?

There’s a grocery two blocks from my home.  If 30 days goes by and they don’t record any purchases from me, coupons for the exact brands I prefer appear in my mailbox. They offer me 30 cents off six cans of Campbell’s® cream of chicken soup, and ring up a hundred dollars or so of other groceries on my next trip in.

And, our relationship is invisible to that grocery’s competitors. No one knows they sent the coupons but them, and me. And maybe my Postman, but he’s not telling.

Customer Data Screen

Customer Data Screen

Do you have a system to capture the pertinent customer information from each sale?  You need one.  You need to identify the characteristics of your Core Customers and apply those to the Presumed Prospect lists.

I promise, better database management leads to more predictable successes when you’re fishing for customers.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about creating a customer database?  Drop Chuck a note at ChuckMcKay@ChuckMcKayOnLine.com. Or call Chuck at 304-208-7654.


1. Martha and Larry are real people. I heard the story from Larry, years after he retired. After three days of her friends, colleagues, and other media reps calling to ask, “Well, are you going to give Larry the appointment?” she did. And, not surprisingly, she eventually placed a schedule.

2. When you send offers to your core customers, call it “Core Mail,” to distinguish it from Direct Mail.

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Gross Margins and Return on Advertising Investment

Elk Snout Gazette

Elk Snout Gazette

Bob’s is the only hardware store in Elk Snout. Bob’s buys a weekly quarter page in the Elk Snout Gazette for $230. Bob’s grosses $6,700 per week, year round (since there are no seasons in Elk Snout).

One day, the new Gazette salesperson convinces Bob’s manager to purchase an additional $200 ad in the Graduation Issue of the paper. That week, Bob’s revenue jumps to $7,100. “Well, I guess the new kid was right,” says Bob’s manager, “we just doubled our money.”

But, as the manager adds up all of Bob’s payables, he seems to have $64 dollars less to pay the bills than he expected. How could he be short? He even had the extra profit from the extra Graduation ad.

By some odd coincidence, you operate a small factory in Elk Snout making stone trivets. You sell them to hardware stores like Bob’s. That salesperson for the Gazette must have been pretty good. He got you to buy one of those $200 ads in the Graduation Issue.

Your gross increased by the same $400. At the end of the month, after you’ve paid the trivet factory bills, you find that you have an extra $15.

You and Bob’s weren’t alone in that Graduation Issue. The injection molding company and the nightclub also purchased $200 ads, and amazingly, they too each saw sales increases of $400 that week.

But when they reconcile their payables, the nightclub seems to have picked up an extra $170, but the injection molding company comes up short $332.

What’s going on??

It’s the effect of gross margin.

Gross margin is profit divided by selling price.

Let’s look at your trivet company financials. Every trivet costs $4.50 to produce. You sell them to Bob’s, and similar stores, for $9.75. Your gross margin is $5.25 divided by $9.75, or 53.8 percent. This means that for every dollar you take in, 53.8 cents falls to the bottom line, while 46.2 cents is consumed in the production of trivets.

The injection molding company operates with a gross margin of only 17 percent, using up 83 cents of every dollar manufacturing the plastic parts which they sell for that dollar.

But over at Bob’s Hardware, each dollar of gross sales produces 34.1 cents in net profit, which means that 65.9 cents of each of Bob’s dollars gets used to purchase and stock the hardware.

And at the nightclub, forty cents worth of rum and 5 cents worth of cola costs the customer $6.00, and provides an astonishing 92.5 percent gross margin.

So, what does gross margin have to do with advertising?

It isn’t simply dollars in minus dollars out.

In Hope is Not a Strategy for Greater Return on Advertising Investment, I said, “If advertising is an investment, you should expect to see a predictable profit from that investment. Invest a dollar in advertising, get back four, or five, or six. At the very least, shouldn’t you get back a dollar ten?

Alas. A dollar ten returned on a dollar invested will have three of our four fictitious companies losing money. You see, each company’s revenue is in gross dollars, but each ad is purchased with net dollars.  When a portion of each gross dollar is eaten up in the expense of generating sales, it takes more of the remaining net dollars to do the job.

You won’t know whether your advertising is profitable until you calculate Return on Advertising Investment (ROAI), wich is the reciprocal of gross margin. If you have a 50 percent margin, your advertising must return at least double your investment. At a 20 percent margin, you’ll need five times the investment. At 5 percent margin your ROAI needs to be 20 times.

Let’s look at this in chart form.

Gross Breaks Even
Investment Margin at ROAI of:
Nightclub $1.00 92.5% $1.08
Trivet Company $1.00 53.8% $1.86
Bob’s Hardware $1.00 34.1% $2.93
Injection Molding $1.00 17.0% $5.88

The last column shows the sales increases each company needs to justify each dollar that company invests in advertising.

If the nightclub gets back anything in excess of $1.08, their advertising is profitable.  But, if the injection molding company doesn’t see sales increases greater than $5.88 for each dollar invested , they’d be better off not advertising at all.

Your trivet company breaks even when each dollar spent returns $1.86. Bob’s breaks even when $2.93 returns. Compared to Bob’s Hardware, you get a $1.07 advantage in every dollar you invest in advertising. But compared to the injection molding company, each dollar your trivet company invests buys $4.02 more.

What about that $200 ad in the Gazette?

The nightclub did well. Your trivet company did, too.

Gross Breaks Even Effect of $400
Investment Margin at ROAI of: Sales Increase
Nightclub $200.00 92.5% $1.08 $170.00
Trivet Company $200.00 53.8% $1.86 $15.20
Bob’s Hardware $200.00 34.1% $2.93 $-63.60
Injection Molding $200.00 17.0% $5.88 $-132.00

OUCH! Bob’s Hardware and the injection molding company not only didn’t make a profit on their $200 advertising investment, they actually lost operating capital.

And it all has to do with Gross Margin.   If you don’t know your margin, how do you know whether your ads are “working?”  How do you even know how much to budget?

Most companies don’t produce only one product.  They need to calculate an average gross margin by dividing total operating profit by total gross sales.

What is your company’s average gross margin? What is the ROAI you need to stay profitable?

Fishing for Customers isn’t simply being ready to “hook ’em.” Sometimes it’s knowing how much you can afford to spend on “bait,” too.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about expressing the specific values and advantages of what you sell? Drop Chuck a note at ChuckMcKay@FishingforCustomers.com. Or call him at 760-813-5474.

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Should I give stuff away?

Fishing 101

Fishing 101

Q: People keep telling me I should give stuff away to get more customers in my store. But doesn’t that just draw people who want free stuff?

A: It stands to reason, doesn’t it, that not everyone will buy from you? The majority of people don’t need what you’re selling. Many won’t need it for some time. Of those who are current prospects, some aren’t willing to pay your price. Some just don’t trust you.

Getting people in your store (or in your sales funnel) who eventually will need what you sell, should help them to become familiar with you. That familiarity should lead to trust, and sales. The free stuff you give away is the price you pay to “buy” customers. Other businesses pay for advertising. Some pay to have more people on staff, providing superior customer service, and resulting in outrageous word-of-mouth.

One way or the other, we all purchase our new business.

But your question is more specific: does giving away “stuff” train your pool of prospects to come to you when they want something for free? The unwritten question is, are you wasting your money by training them to come to you ONLY when they want free stuff? Yes, and no. Yes, in the case of some folks, its likely they will only show up for the free stuff. No, you’re not (necessarily) wasting your money.

Flash back with me to 1713 and Jacob Bernoulli’s Law of Large Numbers, sometimes called the “Law of Averages,” which guarantees stable, long-term results for random events. A casino may lose money on any given spin of their roulette wheel, for example, but always wins over a large number of spins.

Your “free stuff” works like the roulette wheel. A lot of people step up to spin.

How much will you win when the ball lands on red?

To calculate whether you’re wasting money, or have a valid marketing expense, you need three numbers. Fortunately, this is simply a matter of record keeping.

First, how much are you spending to get each prospect in the door?
Second, how much does each spend when they buy from you?
Finally, what percentage of the people attracted by your free stuff promotion, buy?

Let’s say you spend $100 and get 50 people to show up. Your cost per prospect is $20.

When one of those 50 people buys, she spends, on average, $300.

And through experience, we know roughly 4 percent will buy. That makes two sales of $300 ($600 gross), from your $100 investment.

Is this a good investment? Spend $100, get back $600? That depends on your profit margin, doesn’t it? At a standard “keystone” mark-up, your profit is $300, and this promotion is a good one.

Are you training people to come in for the free stuff?

Most of us expect “fairness,” and are disappointed when people get rewarded for behavior we don’t approve of. Yeah, that’s to be expected.

But good marketers, like successful casinos, concentrate more on the sales, and less on the non-buyers.

Run the numbers. Is the overall promotion profitable? Does it produce new customers? Then don’t stop doing it because you resent the freeloaders who only show up for the stuff. The Law of Averages will work to your favor when you’re fishing for customers. And your calculations will make the decision for you.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Questions about buying your customers be directed to ChuckMcKay@FishingforCustomers.com. Or call Chuck at 304-208-7654.

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More SEO and PPC. We must save the General!

George Washington

Washington engraving from $1 bill.

They called the procedure venesection – puncturing a vein to remove blood from the body. From the time of the ancient Greeks, physicians had prescribed bloodletting as treatment to “balance the body’s four humors.”

It was December 14, 1799. General Washington had come down with a sore throat. He called for his estate overseer, Mr. Albin Rawlins and asked for venesection as treatment for his distress. Washington accepted as fact the conventional wisdom that bloodletting was the cure for most physical ailments. After all, he’d seen it cure various maladies of his Negro slaves.

Rawlins estimated that only a small amount of blood need be removed to cure Washington’s sore throat, and took half a pint (8 ounces) of Washington’s blood.

When the General didn’t show signs of improvement, doctors were summoned.

Dr. James Craik was Washington’s personal physician. Arriving to to attend the General, and noting the sore throat had not improved, he performed another venesection, this time, 20 ounces.

When the General didn’t show improvement, he performed a third venesection, removing another 20 ounces.

Hours passed, and the sore throat persisted. Assuming that Washington’s humors were much farther out of balance than he had imagined, Dr. Craik removed 40 more ounces of the General’s blood in the forth venesection.

Dr Elisha Dick, a prominent physician from Alexandria arrived, confirmed with Dr. Craik, and took the only reasonable action. He removed another 32 ounces of blood from the General’s forearm.

Roughly 90 minutes later, having been drained of 130 ounces (seven units) of whole blood, the Father of His Country lay dead.

The Treatment Isn’t Working. We Need More Treatment.

They called the procedure Search Engine Optimization – using choices of specific words to help the pages being “optimized” to rank higher in organic search. From the time of Google’s launch, Internet experts have prescribed SEO, and its step-sister, Pay-Per-Click advertising to “increase traffic to your website.”

In January of 2010 Robert Smith developed a software product which standardized a procedure he called “Diversified Thinking.” Robert built a website to make the software accessible, and offered memberships to his site.

Robert’s brother-in-law was “getting into SEO.” Like many entry-level business people, Robert accepted the conventional knowledge that “more traffic” is the cure to nearly every marketing problem. After all, he’d seen before and after screenshots of successful SEO’d pages.

Robert’s brother-in-law charged only $800 (family discount) for the work necessary to SEO Robert’s site. The brother-in-law optimized the pages on Robert’s site to rank well for the key phrase “Diversified Thinking.”

Other than the odd, unpredictable response from random visitors to his site, Robert’s website wasn’t selling memberships. The brother-in-law suggested Robert consult an expert in pay-per-click advertising.

PPC Experts, Ltd. agreed to handle an Adwords campaign for Robert, charging him $2,000 for their service. Robert waited patiently for two weeks, then called PPC Experts and told them he still wasn’t selling any memberships to his website.

PPC Experts explained that they had purchased keyword phrases involving the phrase “Diversified Thinking.” They suggested that additional related phrases were likely to change public response. Unfortunately, Robert’s retainer had been spent, and they needed another $2,000 to implement those changes. Robert sighed, and wrote the check. Another week went by.

Robert called PPC Experts. They examined the analytics program, and told him the traffic to his website appeared to be increasing. Robert demanded to know when the increased traffic was going to turn into sales. PPC Experts concluded that Robert was poised on the cusp of success. They recommended that he invest another $4,000 in PPC advertising to push past the last market resistance and to protect the investments he’d already made. Robert took a deep breath and gave them his Visa number. PPC Experts charged $4,000 to Robert’s account.

Another ten days went by before Robert fired PPC Experts.

He called the head instructor at the local IT School, and asked for their opinion. The professor looked over Robert’s site, looked at his PPC campaigns, examined the analytics, and concluded that the original SEO was too narrow. He said it should have included secondary phrasing beyond “Diversified Thinking.” The Professor offered to turn Robert’s site into a hands-on experience for his SEO students, and to personally supervise the changes, for only $3,200.

Robert, looking shell shocked, pulled out his MasterCard, and paid the Professor.

On the first of the following month, his savings account and two credit cards having been drained of $13,000, Robert refused to put another dime into his project. His web host shut down his site for non-payment, and his dream of owning a home-based business lay dead.

Conventional, maybe, but not much wisdom.

Robert’s experience is common.

Ridiculous example number one: Lars and Sven purchase hay in Kansas at $2.00 per bale. They sell it in Nebraska at $2.00 per bale. When Lars notices that they don’t seem to be making any profit, Sven says, “I told you we needed a bigger truck.” 

Ridiculous example number two: Mr. Car Dealer throws a party with free hot dogs, free face painting for the kids, and the presence of a radio disc jockey, all of which are designed to get more people to his dealership. If enough of those people buy cars, the event is a success. If not, he concludes the radio station brought the wrong people.

Ridiculous example number three: Web site owners who believe the “secret” to making millions of dollars on the web is to tap into “more traffic,” “increased traffic,” or even better, “unlimited streams of free traffic.” They spend hundreds of dollars on the latest “marketing secret” and are left with nothing to show but fewer dollars in their bank account.

The problem with every one of these examples is pretty obvious. They suffer from the delusion that more of what isn’t working will fix their problem. Instead of searching for qualified buyers, they follow the conventional wisdom “more traffic” solution, and purchase more of what isn’t working.

Its human nature to want to believe anyone who promises instant results.

For hundreds of years people believed that the cure for nearly every physical ailment was bloodletting. (That belief was so pervasive that people didn’t feel the necessity of finding a surgeon** to perform the procedure. Anyone with a sharp instrument could open a vein). In the majority of cases*, venesection did no good, and likely harmed the patient.

In much the same way, convention wisdom calls for additional traffic to solve marketing problems. Sometimes business people get lucky. Most of the time they spend the money and have nothing to show for it.

A technique from direct marketing.

Direct response marketers choose their “lists” carefully. They will invest in prospect lists which are more likely than average to yield customers for what they’re selling. They know each list will be consistent.

If mailing to a particular prospect list returns 7 sales per 1,000 offer packages, it will return 70 sales when they mail 10,000 packages. However, direct response marketers NEVER project the sales from list one against list two. Direct marketers are very picky when it comes to lists.

Both retailers and Internet website owners would do better if they followed direct response examples. Your success isn’t defined by the number of people who pass through your store, and pass up your offering. Your success depends on your ability to narrow your offer from “more traffic” to qualified buyers.

More of what doesn’t work is a sign that there’s a serious flaw in your strategy.

Lest anyone think I’m opposed to either SEO or PPC, I use them both. However, I promise that they are tied directly to a plan to attract qualified buyers, and to a reasonable time frame.

One last thought.

Short-term strategies tend to focus on transactional shoppers. Long-term strategies tend to focus on relational shoppers. It only makes sense that it takes longer to build relationships.

So if your marketing professional tells you you need to invest more money and wait patiently, evaluate which shoppers you’re trying to attract. If you’re targeting transactional shoppers, and not getting response, the cure is never “more traffic.”
__________

* Side note: In a few isolated cases, there is evidence that bloodletting actually does some good. Hypertension (high blood pressure) is relieved by lowered blood volume. People at risk for cardiovascular disease may have, by virtue of lowered blood volume also lowering system iron content, suffered fewer heart attacks. Lowered iron content may also ward off staph infections. And there is anecdotal evidence that lowered blood pressure may aid in pain management.

** Second side note: the red and white striped barber pole hearkens back to the middle ages – an approximation of bloody bandages to let illiterate townspeople know the barber and his sharp razors were ready to bleed them for a fee.
__________

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell. Questions about attracting qualified buyers may be directed to ChuckMcKay@ChuckMcKayOnLine.com, or call Chuck at 304-523-0163.
 

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Hope is Not a Strategy for Greater Return on Advertising Investment.

A couple of decades ago I introduced a friend who sold pianos to the manager of a local radio station. The manager suggested that the piano salesman consider radio advertising sales. The salesman refused.

Sometimes advertising works,” he said, “and many more times it doesn’t. The worst part is you can never predict which is going to happen. I couldn’t in good conscience sell something that I don’t believe will work.

Ouch.

Is advertising more of a gamble than a science?

If advertising is an investment, you should expect to see a predictable profit from that investment. Invest a dollar in advertising, get back four, or five, or six. At the very least, shouldn’t you get back a dollar ten?

But if you you don’t know whether your ads are driving revenue, you can’t very well call it investing. If you don’t know whether you’ll win, or lose, or break even, you are gambling.

And if you put your money into ads that you “feel” are working, but but can’t measure their effect, you’re still gambling.

Noted investor Peter Lynch once said, “An investment is simply a gamble in which you’ve managed to tilt the odds in your favor.

So, maybe effective advertising is that which has been tilted in your favor. Not so much an answer, as a process, which includes better targeting, more effective messaging, and improved media selection.

The purpose of an ad budget?

The reality is that most of us fear that we aren’t turning our marketing dollars into profit. Not consistently. Not directly. Which is why we have advertising budgets. To limit risk.

An ad budget serves the same purpose as going to the casino with a hundred dollars in your pocket and saying “When this hundred is gone I’m done playing. Maybe I’ll get lucky. But I’ve got to set a limit on how much I can afford to lose.

Think about it. If you knew you were going to get back more than you spent, why would you ever stop spending?

Perhaps You Need a Lever.

The Greek mathematician, Archimedes, understood leverage. He’s reported to have said, “Give me a long enough lever and a place to stand, and I will move the earth.

When applied to advertising, leverage means doing more with less. Getting more bang for your buck. Controlling large sums of revenue with relatively small sums invested in advertising. Stacking the odds in your favor.

But, if you were capable of stacking those odds, wouldn’t you also be running more advertising?

A surprising number of companies try to avoid advertising, then force themselves run ads when sales are down or when they have excess inventory.

Unfortunately, they’re open for business all of those other days, too. And they need customers to come buy what they sell on every one of them.

That constant need for additional sales makes advertising the most important thing any of us can do for our own business. What other activity can multiply raw dollars with this kind of leverage?

First, measure.

Do you know your rate of return?

Note your sales levels. Run your campaign. Note any change in your sales levels.

Divide increase by the amount spent. This is Return On Advertising Investment (ROAI). If you are bringing in more money than you are spending, your ROAI is positive. Congratulations.

Of course if your advertising is not effective, the negative ROAI produces a constant drain on your resources. Is this why you don’t advertise often? Do you justify the resulting poor return as “getting your name out there?”

How effective is your lever?

Is your advertising an investment or a gamble?

The primary question you must ask is the rate of your ROAI. Until you know the answer, this is the only question that matters when you’re fishing for customers.

Your Guide,
Chuck McKay

Marketing consultant Chuck McKayYour Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Got questions about expressing the specific values and advantages of what you sell? Drop Chuck a note at ChuckMcKay@FishingforCustomers.com. Or call him at 760-813-5474.

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Guaranteed Advertising ROI in a Tough Economy

How in the world can they afford to keep advertising like they do?

You’ve seen ’em. Those companies who offer to do battle with the IRS if you owe large income tax debt. The credit counseling companies. The medical discount programs. Those who will refinance your mortgage or your structured settlement?

How can they afford the sheer number of ads they’re running? Is business really that good?

Perhaps. On the other hand, maybe they have a different deal. No, not a better price, but an arrangement under which they don’t pay for advertising that doesn’t deliver directly attributable sales.

The arrangement known as “Per Inquiry,” or “PI.” You may also hear it described as “Cost Per Lead.” In the U.K. it’s called “Cost Per Action.” On the World Wide Web it’s known as “Pay Per Click.”

How Does PI Work?

The advertiser and the broadcaster agree to turn some of the broadcaster’s unsold ad time into PI ads for the advertiser. The advertiser does not pay for the size of the ad, nor for the number of ads run, but only a pre-calculated percentage of the actual sales produced by that ad. No more. No less.

The ads contain toll-free phone numbers unique to each broadcaster, which ring into a call center. Experienced telemarketers convert the calls to sales, and report the number of sales to the advertiser and the station.

This can be a great deal for the advertiser.

Why Doesn’t Everyone Use PI?

Television stations, radio stations, and newspapers are looking to sell their time or space for the highest price the market will bear. Most broadcasters won’t accept PI at all, which eliminates the option for most advertisers.

Those who do consider PI will grudgingly accept it as better than nothing, but only at the last possible minute, after they’ve offered fire sale prices to their regular advertisers, after they’ve offered remnant prices to the standby advertisers, if there’s no other way for the broadcaster to turn the unsold time into cash.

That last possible minute schedule will vary from week to week, which makes it hard to achieve enough repetition to help people to remember your product, and imagine themselves using it. Will even the least popular broadcast outlet run a PI ad with enough frequency to make the phone ring? A new direct response campaign will need two or three times the number of ad exposures required for a long term branding campaign.

Another frequency problem becomes obvious when one realizes that PI requires quick response. If they can’t see a payoff this week, broadcasters won’t continue to run the ads next week.

It All Comes Down to Reduction of Risk.

If one is willing to overlook the cost of lost opportunity, performance based advertising is largely zero risk for the advertiser. For the broadcaster though, there’s a serious probability that the ads will never produce any revenue.

Why? Because the advertisers most likely to ask for a PI deal are under-capitalized businesses with ads that aren’t working well. Instead of fixing the offer and increasing persuasive appeal of their ads, these advertisers look at PI as a great way to obtain cheaper exposure for their existing lame ads.

And that puts all of the risk on the broadcasters.

The offer is selected by the advertiser. The copy is written by the advertiser. The production is again handled by the advertiser. The broadcaster has to trust that the advertiser has done all of these things well. How much risk will broadcasters take? Frankly, it depends on the amount of unsold commercial time on their stations.

How Much Will PI Cost?

Let’s take a lesson from our brethren in direct marketing. Direct marketers know to the penny the amount they are willing to pay for each response to their advertising.

But calculating what the advertiser is willing to pay is only half the equation. How much will it take to motivate the broadcaster to accept performance based advertising? That’s the other half, and it’s critical.

We can assume a broadcaster will be more willing to accept a PI arrangement if the advertiser is willing to reduce some of the broadcasters’ risk.

First, pay those broadcasters the highest amount possible for each response. Experience has shown that a 50/50 split will usually enlist the cooperation of the broadcaster. On most items the math works out to a minimum necessary profit margin of six times cost. Will the product sell for six times the advertisers cost?

If the advertiser can purchase or manufacture say, an orthopedic pillow for $3 each, sell them in pairs for $40, and allow another $5 for fulfillment, there’s a gross profit of $29 per order. Split the profit and offer broadcasters $14.50 per sale.

Second, direct marketers also test market. They’re sure the numbers work for each mailing piece, each list they mail to, and each new broadcast outlet which carries their ads. The biggest television stations, those which are making a handsome profit in PI, (think “Superstation.”), require proof that the ad has produced significant sales in other markets.

So, if our hypothetical advertiser pays for ads which test the offer, test the presentation, and offer broadcasters a proven product and predictable success, the odds of future PI arrangements go up dramatically.

Then there’s the customer.

Consider all that the customer has to go through to place that order. She has to understand the offer while she’s being distracted by life. (Most of us don’t pay rapt attention to advertising, regardless of the medium).

Then, before she forgets it, Miss Customer needs to remember the number, or to write it down.

Finally, she needs that last emotional push to tear herself away from what she was doing and to correctly dial that number.

There is a theory that, even though PI generates few calls, those who do call convert at higher rates because of all of the pre-qualification steps they’ve already gone through. But, any skepticism about your offer on the customer’s part and she’ll never bother to go through all those steps.

Here’s where we split from direct marketing philosophy.

In PI, the hard sell of direct response doesn’t work as well as does the soft sell of lead generation. An advertiser will dramatically boost results by changing the immediate goal from getting a credit card number to harvesting the names, addresses, and phone numbers of new customers in order to contact them directly in the future.

Offer a free information kit, free video demonstration, free sample, or free trial. Give a free estimate or free quote. Stack on additional value until Miss Customer is compelled to pick up her phone and call now.

The fulfillment program is critical.

Without the cash register ringing, how will your broadcast partner get paid? What will you consider a response? How will you track it? The math is pretty straightforward. If experience shows you’ll convert one prospect out of five, and your average profit is $30 per sale, then each lead is worth $6.

You may need to retrain or replace your call center operators. In this new two step process, its critical that they understand the art of the upsell as well as the secondary sell.

Final Thoughts About Making PI Work For You.

Think big. Do you sell manufactured housing? What’s it worth to sell an extra home this month? $700? $1,000? Cut a deal with a radio or TV station to pay that much for each unit more than your monthly average. Point out that they can come count the units on your lot to check their progress. Could your broadcast partner make an extra $3,000 this month by running your PI ads in prime time? Watch their resistance to PI melt.

Alternatively, offer cash, but ask for a guarantee. Tell your broadcast partner that you’ll place a schedule of $500 per week, but that you’ll need to see 25 responses each week. It’s been my experience that stations will work harder to protect $500 already on the books than they will to earn an additional $500.

Per Inquiry is not cheap advertising, but it does have the advantage of being accountable and replicable. Done properly an advertiser can generate high quality leads or sales at a predictable cost. Perhaps your company could benefit from PI.

Source: http://www.allbusiness.com/print/11736532-1-9a0bs.html#ixzz1bwlH1Jon

 

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Lower Your Profit Margins – Surviving The Recession – Part 5 of 7

Supply and demand tend to be somewhat elastic. Changing one causes a reciprocal effect on the other. When demand drops, supply increases, and all too often consumption decreases, too.

In our terms, that means gross sales will head south as people determine they can’t afford to buy as much of what you sell.

But truthfully, people will still buy.

They’ll buy from someone. Will they buy from you?

  • Two years ago Best Buy cut their profit margins by three to five percent. They watched same store gross sales rise by 8.3 percent.
  •  

  • Last year Wal-Mart cut prices on back-to-school items by as much as 50 percent, and saw their sales climb by 6.5 percent.
  •  

  • This year it’s Safeway and Amazon. As a result of their decreased prices Safeway’s revenue increased 7.3 percent, and net income 11 percent, while Kroger and Supervalu dropped 1.8 and 18 percent respectively. Amazon cut prices and watched their second quarter sales shoot up 41 percent, doubling their profit in the process.
  • What can we conclude? Consumers will continue to spend, and lower profit margins can help you gain disproportionate share of that spending.

    Those extra shoppers can actually push your gross sales to record-breaking territory.

    Should you be discounting?

    Yes. Yes, you probably should. Slow times are when you drop the prices on your products and services to motivate those customers on the fence to come shop with you.

    Reduce your margins by enough to stop the bleeding. Ten percent? Fifteen? You’ll have to keep close tabs on your costs, your volume, and your margins, but there is a number that will spur sales enough to keep you profitable.

    But don’t just drop prices. Make it part of a promotion so that shoppers take action NOW, and so that you’ll have less resistance to raising those prices again in a few months when the economy improves.

    Notify your existing customers of your new promotion. Buy advertising to inform potential customers.

    One more thought:

    Until the recession shows signs of easing, you’ll need customer goodwill more than ever. And you can’t gain goodwill with a sales event.

    A sales promotion will attract customers. It will generate revenue. But, it will also draw those customers which will be the first to shop your competitor when he drops prices, too.

    Goodwill results from personal service, which is created by your staff. Low prices will bring them in.

    Good manners, friendliness, and appreciation will keep them coming back.

    __________

    Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about helping your business thrive during an economic recession may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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