profitability

Bob Stone says: "Creativity in direct marketing campaigns brings recognition, awards and applause. But behind every successful campaign, one or more mathematics major makes the creativity work. They're among the unsung heroes of direct marketing."

Before you attempt any marketing campaign, you need to look at the two most important aspects: the basic mathematical formulae - Breakeven Analysis - the "What if..." observation - and your Return on Investment (ROI).

As with your business forecast, you typically perform a breakeven analysis before implementing a marketing campaign and it should be done across several levels, e.g. variable cost, overhead, pre-tax level, etc. You can also use breakeven analysis after a campaign to measure its overall success or determine the performance of individual target segments.

Breakeven analysis (also known as breakeven point of profit) is a very useful tool for all marketers. It essentially works as a profit-and-loss for solving variables, and it enables you to determine:

*	The profitability of the proposed product line, campaign and your customer
*	How far sales can decline before a particular product begins to incur losses
*	The response and conversion needed for your campaign to break even
*	What sales you need, to make the product profitable or to break even
*	How many units of a (new) product have to be sold before it becomes profitable
*	How much money you have to spend on marketing to make a product profitable
*	What effect a reduction of the selling price (discounts for marketing offers) or the volume of goods sold will have on the business's profitability
*	What the effect on profitability will be if overhead expenses increase (levels of calculations)
*	How much more will have to be sold at current price levels to make up for an increase in the cost of sales.

Think about Lifetime Value

The profit from your customer is not in their first purchase, but in them buying continually from you - the lifetime value of your customer. Your Return on Investment (ROI) is normally calculated on the Lifetime Value (LV) - your total earnings from your customer over their lifetime with you.

What is important is that you need to estimate what this number will be before you embark on any marketing campaign as part of your business strategy. This number is what enables you to measure your ROI.

Lifetime Value is measured on a predictor called RFMP - Recency, Frequency, Monetary Value and Product Category.

*	Recency - when was the last time your customer made a purchase. If your customer has recently purchased from you, then it is more likely that they will purchase again - assuming that they had a good experience - customer service.
*	Frequency - how often does your customer purchase? The more often your customer purchases, the more likely they will purchase from you again.
*	Monetary - how much does your customer spend? The more your customer spends, the more valuable they are and the more they will spend.
*	Product Category - what products or services your customer purchase. The type of products your customer purchases or services that they use will assist you in identifying their lifestyle and will assist in cross-selling opportunities.

You use the RFMP measurement to decide which of your customers to market to, how often and what products and services to offer. You also need to study their buying and paying behaviour. Don't waste your marketing Rands on customers who become less and less likely to buy again.

These numbers are the compasses from which marketers take their direction. As a responsible business you should think of your marketing budget as an investment in your business and not as expenditure.