Human brains are well suited for some tasks, and poorly suited to others.
Our grey matter excels at creative pursuits, but it’s easily stumped when it comes to even the most rudimentary logic.
We are reminded of this regularly when we talk to subscribers about their management of promotional expenditure.
Almost without exception, we find that promotional expenditure is managed using, at best, totally irrelevant metrics and, at worst, no (objective) metrics at all. (That’s right, your Personal Assistant’s opinion is not an objective metric!)
As a result, we find the following problems in almost every organisation:
- Money is wasted on campaigns that are not commercially viable.
- Too little money is spent on campaigns that are viable.
- Viable campaigns are discontinued (generally because management has become tired of them).
- All failures are written-off as ’successful branding exercises’.
For years, we have used a simple report to manage our promotional campaigns — and those of our clients. If you spend money on promotion, you should be generating this report on (at least) a monthly basis.
If you’re not, I can almost guarantee that you’re suboptimising the effectiveness of your sales process!
Our Activity by Source report will allow you to allocate a source (promotional campaign) to every new relationship (inquiry).
It will enable you to measure the relationship between promotional expenditure and the gross profit generated by that expenditure.
Accordingly, our Activity by Source report will enable you to determine which promotional campaigns are commercially viable, and then rank the viable campaigns in other of their cost-effectiveness.
The Activity by Source report works by comparing your acquisition cost (the amount of money you spend on promotion to generate a sale), with your allowable acquisition cost (the amount you’re prepared to spend).
Because sale cycles are often long, this report enables you to use cost per response as a short-term indicator.
To use this report, simply follow these steps:
- Determine your allowable acquisition cost. What percentage of the lifetime value of a client relationship (gross profit) are you prepared to invest to acquire that relationship in the first instance?
- Allocate a source to every new relationship (inquiry). ’Unknown’ is not a source. If your system allows this entry, this needs to be remedied immediately!
- Record the media cost associated with every source (promotional campaign). You should only measure media cost because this is the key variable in your promotional process. The other costs associated with your sales process (postage, collateral materials, etc) can be taken into account in the calculation of your allowable acquisition cost.
At the end of each period (month), calculate your average acquisition cost (total promotional expenditure, divided by total number of sales). Compare your average acquisition cost with your allowable acquisition cost.
If your average acquisition cost is greater than your allowable, either reduce your promotional expenditure or change your promotional mix. If your average acquisition cost is less than your allowable, increase your promotional expenditure.
Plan your next month’s promotional activities by favouring those campaigns that generate the lowest cost per response.
Remember, you should spend all of your allowable acquisition cost. To underspend is false economy. Your sales process is a money-making machine, why would you want to run it at anything less than full capacity?