Social Media Marketing All-in-One For Dummies. Michelle Krasniak
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Understanding Other Common Business Metrics
Your bookkeeper or accountant can help you compute and track other business measurements to ensure that your business turns a profit. You may want to pay particular attention to estimating your break-even point and your profit margin.
Break-even point
Computing the break-even point (the number of sales needed for revenues received to equal total costs) helps determine when a product or product line will become profitable. After a product reaches break-even, sales start to contribute to profits.
To calculate the break-even point, first you need to figure out the cost of goods (for example, your wholesale price or cost of manufacturing) or average variable costs (costs such as materials, shipping, or commission that vary with the number of units sold) and your fixed costs (charges such as rent or insurance that are the same each month regardless of how much business you do). Then plug the amounts into these two formulas:
revenues – cost of goods (variable) = gross margin
fixed costs ÷ gross margin = break-even point (in unit sales)
Figure 2-5 shows this relationship. This graph of the break-even point shows fixed costs (the dashed horizontal line) to variable costs (the solid diagonal line) to plot total costs. After revenues surpass the break-even point, each sale contributes to profits (the shaded area on the right).
FIGURE 2-5: The break-even chart plots fixed plus variable costs; each sale after the break-even point contributes to profits.
The break-even analysis tool from the Harvard Business School Toolkit (http://hbswk.hbs.edu/archive/1262.html) can also help you calculate your break-even point.
Profit margin
Net profit margin is defined as earnings (profits) divided by revenues. If you have $10,000 in revenues and $1,500 in profits, your profit margin is 15 percent (1500 ÷ 10000 = 0.15).
Revenue versus profit
One of the most common errors in marketing is to stop analyzing results when you count the cash in the drawer. You can easily be seduced by growing revenues, but profit is what matters. Profit determines your return on investment, replenishes your resources for growth, and rewards you for taking risks.
Determining Return on Investment
Return on investment (ROI) is a commonly used business metric that evaluates the profitability of an investment or effort compared with its original cost. This versatile metric is usually presented as a ratio or percentage (multiply the following equation by 100). The formula itself is deceptively simple:
ROI = (gain from investment – cost of investment) ÷ cost of investment
The devil is, as usual, in the details. The cost of an investment means more than cold, hard cash. Depending on the type of effort for which you’re computing ROI for an accurate picture, you may need to include the cost of labor (including your own!), subcontractors, fees, and advertising. When calculating ROI for your entire business, be sure to include overhead, cost of goods, and cost of sales.
You can affect ROI positively by either increasing the return (revenues) or reducing costs. That’s business in a nutshell.
You can calculate ROI for a particular marketing campaign or product, or an entire year’s worth of marketing expenses. Or compare ROI among various forms of marketing, comparing the net revenue returned from an investment in social media to returns from SEO or paid advertising.
Try the interactive ROI calculator at www.clickz.com/website-optimization-roi-calculator, which is also shown in Figure 2-6. You can modify this model for social media by treating Monthly Site Visits as social media visits, Success Events as click-throughs to your main site, and Value of Success Events as the value of a sale. See what happens when you improve the business metric (the value of a sale) instead of, or in addition to, improving performance (site traffic or conversion rate).
Courtesy of ClickZ.com
FIGURE 2-6: Play around with variables, such as the value of a sale, and performance criteria.
ROI may be expressed as a rate of return (how long it takes to earn back an investment). An annual ROI of 25 percent means that it takes four years to recover what you put in. Obviously, if an investment takes too long to earn out, your product — or your business — is at risk of failing in the meantime.
Technically, ROI is a business metric, involving the achievement of business goals, such as more clicks from social media that become sales, higher average value per sale, more repeat sales from existing customers, or reduced cost of customer acquisition.
Many people try to calculate ROI for social media based on performance metrics such as increases in
The amount of traffic to website or social media pages
The number of online conversations that include a positive mention of your company
References to your company versus references to your competitors
The number of people who join your social networks or bookmark your sites
The number of people who post to your blog, comment on your Facebook page, or retweet your comments
These