When we first started the business, most of our clients were small businesses that were barely breaking even. The one thing they all had in common was a complete lack of understanding of the basic principles of accounting.
The first step to running a successful business is to make sure that income is higher than costs. While this may sound like a simple concept, we have met numerous business owners who will drive up their costs, with little or no chance of it increasing their income. This is especially true when it comes to online spending.
One cost every business should have is a marketing budget. While most businesses can tell you to the cent what they spent on marketing, not many can tell you how much profit they made from the marketing spend.
Today we will cover a couple of accounting concepts, that you, the business owner should track.
Return on Investment (ROI)
If you follow the marketing material of any of the big tech corporates like Microsoft, you will see that ROI is one of their biggest selling points.
What exactly is ROI?
If your business spends R10 000 per month on Google Ads, and you generate R100 000 in sales from those Ads, your ROI is 900%. There is a simple formula to calculate this ROI = (Income – Cost)/(Cost). ROI is always expressed as a percentage.
One of the biggest challenges is tracking sales from your marketing efforts. Digital marketing analytics gives us the power to track every interaction with your website. We are then able to assign monetary values to those interactions and give you a fairly accurate idea of earnings.
By taking some time to explore what you will be marketing and the potential for earnings, you can quickly see if it will be worth your while to spend money on keywords. Many of the businesses we work with, end up targeting products or services that they would not have selected as their first choice, but further analysis will get them the most leads and sales.
Cost per Conversion
We do a lot of Pay-Per-Click (PPC) advertising, and one of our favourite metrics is the Cost per Conversion. The cost per click is easy to see, but if you have goals set up, you can track when users performed the action you wanted; they bought the products, they signed up for your newsletter, they requested a callback.
An example would be that your keyword gets 1000 clicks in a month, but of these 1000 only 100 subscribed to your newsletter. Your cost per click was R2.50, so you spent R2500 to get 100 newsletter subscriptions. You now know that it cost you R25 per conversion.
Why is the Cost per Conversion important?
If you only make a R20 profit off each person who signs up for your newsletter, is it worth spending R25 to get a subscription? Here you would look at how to get a better conversion rate from clicks to sign-ups. If you could get 500 of the visitors who clicked on your ad to sign-up, your cost per conversion would only be R5, and your profit for the month would be a cool R7500.
What is a profit margin?
We regularly meet up with potential clients who have no idea what profit margins are. For us, this is the basis for all our recommendations to you. There is no point in spending R25 to market a product that you are only going to make R20 from.
Profit margin can be simple or complex. Simple profit margin is taking your cost for the item or service and subtracting that from your selling price. Complex profit margin is when you factor in other costs like rent, salaries etc, and divide them across how many products or services you sell in a month.
While a complex profit margin may seem better, the time and effort involved in calculating it is sometimes not worth the effort.
The last topic for today is break-even points. As the name suggests, this is where income and expenses are equal. You should have a break-even point mapped for every single digital marketing investment. You should also have a timeframe on how soon you would like to reach it.
We recommend that your break-even point is set at an amount that won’t break the bank, even if you don’t hit it in the first month. Rather grow into your digital marketing budget than try to go too big too early.