Module 6 - Know your financials

Why does profit matter more than ROI?

Because profit is what actually lands on the bottom line, and ROI can hide a loss. Knowing your financials throughout this whole process is going to be the basis of what we are trying to do. We are all here trying to make profit. Return on investment, yes, but I absolutely prefer genuine profit. What profit are we making from our campaign?

It is easy to sit back as a marketeer and say, I am getting 4x, 5x, 20x ROI. Probably once you get to that sort of stage you do not necessarily care. But it comes down to the profit which is in your campaign, and that includes things like your time, what else is going on, how long you have been running the campaign, and the cost of your product and service.

Sorry if I am teaching some people to suck eggs. My background is that twenty years ago I was an accountant, and I learned very quickly that business is more about profit, the bottom line. If you are working for people, the bottom line is what they are going to care about. How much profit did we make? Not sitting there in a meeting saying, yeah, we got five times, six times, seven times ROI. Fine, that is an indicator, but I am absolutely fed up with people talking about ROI. You need to be talking about profit, and if you do not want to talk about profit and you want to talk about ROI, you need to know what your profit is.

What has to go into the plan?

All of your costs, plus an element of time, plus the agency retainer if there is one. That all comes out of a plan, and you absolutely must create a plan.

You may well be working for yourself if you are watching this course, or you may be working for an agency. If you are in an agency, you obviously need to include your agency retainer as well within those costs. A lot of the time we see people saying, we got four times ROI, great. Did you include the retainer? No. Did you include your time? No. Once you do that sort of thing, does the campaign make money? Maybe, maybe not.

When we are running campaigns for people, we need to understand the actual cost of the product or service that we are selling, and the sales price, which gives us a gross profit. That is the difference between what something costs us and the sales price. I know this might sound obvious, but a lot of people are working out an ROI just based on, my product costs 10 and I have sold it for 20, so I have got 2x, and that is not the way to go about this.

What does a thin margin do to a campaign?

It makes the campaign close to impossible, because you need almost everyone who lands to buy. There are a lot of products like that. I have worked in an extremely competitive industry where we had a seven per cent profit margin. Imagine running a campaign on a product that has a seven per cent margin. When we sold something for a pound and seven pence, it cost us a pound for the product.

I challenge many people out there to even come close to making that into a profitable campaign, because you need to get almost every person who lands on your product to buy to make it profitable if you are running it through a social media campaign. There are an awful lot of products that do not do that.

The reality is that a lot of people watching this course are selling SaaS products or coaching, where the product costs very little. With a SaaS product, yes, there is development cost in it, but once it is finished the cost per sale is zero, because maybe there is some server support or time in it, but no physical cost. If you are selling a physical product, an e-commerce product, you need to know what your margin is and how much profit you make per sale.

How do you get to a true profit figure?

You take the cost, the profit, the media cost, the agency fee and your time, and then you have a reckoning. All of this is really easy to do, but it means you have got to write it down and work it out, and then at the end you can actually see whether your entire effort was profitable.

Make sure you are being realistic and including all of the associated costs in the product, not just the cost of the product. We see that all the time as an agency. We will put proposals out that say we estimate to sell a thousand of x product, which gives you x amount of margin, but after that you have got to take out your media cost, your agency fee and the time to do it. That is when you get to a true profit, and the true profit on a product really matters.

You are going to have to account over time, and if you are not an accountant, it is not difficult. It is cost, less profit, less the cost, less your time, which will give you an indication of what you are able to do.

Where do you actually make your money?

In lifetime customer value. That is where you are going to make your real money.

We often look at campaigns in a way where it might even cost you to acquire a customer. There are a lot of people who go into these marketing campaigns expecting a silver bullet. They expect to be able to make profit off the bat.

If I came to you and said, I will give you a thousand customers, what is that worth in the long run for your business? It is not just what a thousand sales achieve. Yes, a thousand sales times x profit is brilliant, but does that take your business forward long term? Does it mean that your business will be a success? Are you going to sell more products into that group? What comes out of your remarketing? You have got to look at all of these things and at your ongoing promotion to work out what the lifetime value of a customer is.

What if acquisition costs more than the first sale?

Then you treat it as investment in acquiring a customer, not as a failure. It may well be that your cost of acquisition of a customer is more than the profit in the initial sale to that customer, and some people will step back and go, whoa, hold on a minute, I cannot afford to do that.

If you are going to scale and grow a business, you need to look at investment in marketing as acquisition of a customer, and ask what the cost of that acquisition is, rather than expecting profit from a cold audience. If you go into this type of campaign thinking it is as simple as, I will run some ads and I will make some profit, you are going to be sorely disappointed very quickly.

You have got to get through that testing phase, and in the testing phase you are likely to make a loss. Well, hold on, news flash. I am making a loss during testing. That is called investment. You are investing and learning and finding out what the cost of acquisition is.

What is free marketing?

Free marketing is when the cost of acquiring a customer is less than the profit on the campaign. If you can cover the cost of all your marketing with your profit, not with your ROI, with the profit element, you are getting free marketing at that point. You are acquiring customers for free, or acquiring customers without it actually costing you anything in terms of margin.

At that point you are able to scale, and it is scaling within that profit margin, and that gives you the growth. Make sure you watch the sections within the course about how to scale properly, how to work your funnel out and scope that funnel out properly, because you do need the back end systems. That is where the real profit is.

What does the front end versus remarketing difference look like?

On one of our agency campaigns, the front end acquires customers at nearly 140 pounds while the remarketing loop acquires them for around seven. Literally, for example, 50 per cent of the cost of the product might go on acquiring the customer on the front end, and if you left that campaign running you would make a loss.

But on the remarketing side of the same loop, the same product, that same customer is being acquired at roughly five per cent cost of the product. So when you take those two things into consideration, in that example they are getting customers at seven pounds on a product that costs 300. I am a bit of a geek in terms of numbers, but working out what the ROI on that is, it is phenomenal. Whereas on the front end their cost of acquisition is nearly 140 pounds. So take that example campaign on its own and it does not work.

It is about linking everything together to understand your actual profit. You are not going to get into that remarketing loop properly within the first couple of months anyway, unless you have got a massively active website and a fully fledged funnel that is working for you from day one. Do not expect to make or understand your actual profit within the first month or two of running YouTube ads.

So what should you be aiming at?

Think long term, work out what your actual profit is, and work out what the lifetime value of a client is to you. Initially, during the testing phase, you are trying to achieve more than a one-to-one cost of acquisition, so that acquiring a customer sits within the profit margin of the product.

If you can do that, the word spreads. Providing you have got a good customer, good service and a good offer, people will spread the word, your business will grow, you will be able to invest more in marketing, and that is how you scale and grow. Not through cold traffic making x profit and going, oh fantastic, I am making x ROI.

So start thinking in terms of profit rather than ROI, and I will see you in the next little lesson.