Marketing Essentials, Marketing Math Workbook

By McGraw-Hill

Marketing Essentials Marketing Math Workbook

by Lois Schneider Farese Synopsis not available.

The Marketing Equation

Posted on September 4, 2011

Most business owners typically focus on either one or two aspects of their business: total revenue or net profit. The common mindset is increase one, and youll increase the other. But total revenue and net profit are results. The only way to change a result is to influence the components that make it. Think about it: you cant bake a better pie with the same recipe you have to change some or all of the ingredients. Theres a better way to grow your business its called The Marketing Equation. With this simple formula, Ill show you how to change end results, such as net profit, by focusing on the variables that influence each one. The only numbers youll ever need to know:

Prospects X Conversion Rate = Customers Customers X Transactions X Average Sale = Total Revenue Total Revenue X Margin = Profit

Its important to understand that results cannot be changed. Everything before an equals sign is a variable to improve upon; everything after an equals sign is a result. The only way to influence a result is improve upon the variables that make up the result. So, if youre a business only focusing on Margin, youre missing out on several other ways to improve your bottom line. Step 1: Prospects X Conversion Rate = Customers Lets start with the first variable, Prospects. Since this is technically a result, we can influence and increase Prospects by marketing directly to a select group of suspects (people who demographically match your typical customer). Youll also save money on wasteful image advertising, which cannot be tracked and only serves to make your advertising sales representative more commissions.

Successfully implement a unique selling proposition (USP) the reason why someone should buy from you and youll instantly improve upon the Conversion Rate of prospect to customer. When you multiply Prospects and Conversion Rate, your result is Customers. Step 2: Customers X Transactions X Average Sale = Total Revenue When marketing to your Customers, maximize your follow up marketing, community relations and direct mail to make your business the obvious choice when Customers are looking for what it is you sell. Along with your USP, this is the only surefire way to increase both Transactions and Average Sale. Multiply Customers, Transactions and Average Sale together and your result is Total Revenue. Step 3: Total Revenue X Margin = Profit In the final step, multiply Total Revenue by Margin, to calculate your Profit. If youve implemented all 7 steps of my marketing system, youre no longer competing on price youre competing on value, and can easily increase yourMargin. The Marketing Equation, Illustrated Lets take a look at how slight improvements in one area to small improvements in all areas stack up:

This example shows how small improvements dramatically change your bottom line.

Lets say your business has 100 prospects, and you convert 20% of them into customers. You then sell them 10 times throughout the year an average of $10 per transaction. Youll make $2000 in sales. On your 10% margin, this results in $200 of profit. Not bad. What happens if you improve just one variable? If youre like most businesses, youre really only focusing on one area for growth. If you look at the second column, weve increased only the number of Prospects by 10%, to 110. This results in an additional $20 net profit, for a total net profit of $220. So, by improving just one variable by 10%, youve added an additional 10% in profit. Pretty good. Minor improvements in all variables = dramatic results. But youre not just any business. Youve gone through and implemented all 7 steps in the marketing plan, and youre able to increase all factors by 10%. This returns greater than 61% in profit! Its

incredible to see the power of making minor improvements work together and build upon the small success in each variable to return a sum greater than the individual parts.

Marketing Math Formulas

These Mathematical formulas will help your marketing ROI Identify economic factors that drive marketing profit and loss Calculate break even and profit or loss using costs and factors right for your business Establish what metrics are the best measures of success Ascertain what your customers are worth and how much to spend to acquire new ones Track responses in all media, including the Internet. Determine which statistical formulas to apply to predict future behavior Youll need only basic arithmetic: +, -, x, and . No complex math here just practical tools presented in a language anyone can understand Anyone who needs to understand what makes a direct marketing program financially viable. These formulas will prove invaluable to you if youve recently begun working in any of the following functional areas of direct marketing: *Marketing * Analysis * Accounting* Advertising You will also benefit if youre a professional working for any of the following support firms serving direct marketers: *Advertising Agencies * Printers * Service Bureaus * List Brokers Cost of Goods Sold COGS = Beginning Inventory + Purchases Ending Inventory Gross Margin Gross Margin = Total Sales Cost of Goods Gross Margin Return on Investment GMROI = Gross Margin $ Average Inventory Cost Initial Markup Initial Markup % = (Expenses + Reductions + Profit) (Net Sales + Reductions) Inventory Turnover (Stock Turn) Turnover = Net Sales Average Retail Stock Maintained Markup MM $ = (Original Retail Reductions) Cost of Goods Sold MM % = Maintained Markup $ Net Sales Amount Margin % Margin % = (Retail Price Cost) Retail Price

Markup Markup $ = Retail Price Cost Markup % = Markup Amount Retail Price Net Sales Net Sales = Gross Sales Returns and Allowances Open to Buy OTB (retail) = Planned Sales + Planned Markdowns + Planned End of Month Inventory Planned Beginning of Month Inventory Percentage Increase/Decrease % Increase/Decrease = Difference Between Two Figures Previous Figure Quick Ratio Quick Ratio = Current Assets Inventory Current Liabilities Reductions Reductions = Markdowns + Employee Discounts + Customer Discounts + Stock Shortages Sales per Square Foot Sales per Square Foot = Total Net Sales Square Feet of Selling Space Sell-Through Rate Sell-Through % = Units Sold Units Received Stock to Sales Ratio Stock-to-Sales = Beginning of Month Stock Sales for the Month

Retail math is often used in various ways by store owners, managers, retail buyers and other retailing employees. It is used to evaluate inventory purchasing plans, analyze sales figures, add on markup and apply markdown pricing to plan stocks. Although there are computer programs and other tools available, performing these retail math calculations often requires familiarity with formulas. Use the following equations and retail math formulas to track merchandise, measure sales performance and help create pricing strategies. Acid-Test Ratio Acid-Test Ratio = Current Assets - Inventory Current Liabilities Average Inventory Average Inventory (Month) = (Beginning of Month Inventory + End of Month Inventory) 2 Basic Retailing Formula

Cost of Goods + Markup = Retail Price Retail Price - Cost of Goods = Markup Retail Price - Markup = Cost of Goods Break-Even Analysis Break-Even ($) = Fixed Costs Gross Margin Percentage Contribution Margin Contribution Margin = Total Sales - Variable Costs Cost of Goods Sold COGS = Beginning Inventory + Purchases - Ending Inventory Gross Margin Gross Margin = Total Sales - Cost of Goods Gross Margin Return on Investment GMROI = Gross Margin $ Average Inventory Cost Initial Markup Initial Markup % = (Expenses + Reductions + Profit) (Net Sales + Reductions) Inventory Turnover (Stock Turn) Turnover = Net Sales Average Retail Stock Maintained Markup MM $ = (Original Retail - Reductions) - Cost of Goods Sold MM % = Maintained Markup $ Net Sales Amount Margin % Margin % = (Retail Price - Cost) Retail Price Markup Markup $ = Retail Price - Cost Markup % = Markup Amount Retail Price Net Sales Net Sales = Gross Sales - Returns and Allowances Open to Buy OTB (retail) = Planned Sales + Planned Markdowns + Planned End of Month Inventory - Planned Beginning of Month Inventory Percentage Increase/Decrease % Increase/Decrease = Difference Between Two Figures Previous Figure Quick Ratio Quick Ratio = Current Assets - Inventory Current Liabilities Reductions Reductions = Markdowns + Employee Discounts + Customer Discounts + Stock Shortages Sales per Square Foot Sales per Square Foot = Total Net Sales Square Feet of Selling Space

Sell-Through Rate Sell-Through % = Units Sold Units Received Stock to Sales Ratio Stock-to-Sales = Beginning of Month Stock Sales for the Month

Retail Math Calculators Calculator: Markup & Markdown Calculator: Sales Increase Startup Costs Calculator Tracking Sales Beat Yesterday Book Measure Sales Performance Retail Store Operations Performance of Selling Space Sales per Square Foot The sales per square foot data is most commonly used for planning inventory purchases. It can also roughly calculate return on investment and it is used to determine rent on a retail location. When measuring sales per square foot, keep in mind that selling space does not include the stock room or any area where products are not displayed. Total Net Sales Square Feet of Selling Space = Sales per Square Foot of Selling Space Sales per Linear Foot of Shelf Space A retail store with wall units and other shelf space may want to use sales per linear foot of shelf space to determine a product or product category's allotment of space. Total Net Sales Linear Feet of Shelving = Sales per Linear Foot Sales by Department or Product Category Retailers selling various categories of products will find the sales by department tool useful in comparing product categories within a store. For example, a woman's clothing store can see how the sales of the lingerie department compared with the rest of the store's sales. Category's Total Net Sales Store's Total Net Sales = Category's % of Total Store Sales Measuring Productivity of Staff Sales per Transaction Also known as sales per customer, the sales per transaction number tells a retailer what is the average transaction in dollars. A store dependant on its sales clerks to make a sale will use this formula in measuring the productivity of staff.

Gross Sales Number of Transactions = Sales per Transaction Sales per Employee When factoring sales per employee, retailers need to take into consideration whether the store has full time or part time workers. Convert the hours worked by part-time employees during the period to an equivalent number of full-time workers. This form of measuring productivity is an excellent tool in determining the amount of sales a business needs to bring in when increasing staffing levels. Net Sales Number of Employees = Sales per Employee These are just a few of the ways to measure a retail store's performance. As retailers track these numbers month after month and year after year, it becomes easier to understand where the sales are generated, by which employees and how the store's merchandising can maximize sales growth. Tracking Retail Sales

Break-Even Point Create a Beat Yesterday Book Retail Math Resources More on Measuring Sales Retail Traffic Patterns Take Those Numeric Ratings and Three Methods of Sales Forecasting

Marketing campaigns are investments. And like any smart investment, they need to be measured, monitored and compared to other investments to ensure youre spending your money wisely. Return on investment (ROI) is a measure of the profit earned from each investment. Like the return you earn on your portfolio or bank account, its calculated as a percentage. In simple terms, the calculation is: (Return Investment) Investment Its typically expressed as a percentage, so multiple your result by 100. ROI calculations for marketing campaigns can be complex you may have many variables on both the profit side and the investment (cost) side. But understanding the formula is essential if you need to produce the best possible results with your marketing investments.

For marketing ROI, the tricky part is determining what constitutes your return, and what is your true investment. For example, different marketers might consider the following for return:

Total revenue generated for a campaign (or gross receipts or turnover, depending on your organization type and location, which is simply the top line sales generated from the campaign) Gross profit, or a gross profit estimate, which is revenue minus the cost of goods to produce/deliver a product or service. Many marketers simply use the companys COG percentage (say 30%) and deduct it from the total revenue

Net profit, which is gross profit minus expenses.

On the investment side, its easy for marketers to input the media costs as the investment. But what other costs should you include? To execute your campaign, you might have:

Creative costs Printing costs Technical costs (such as email platforms, website coding, etc) Management time Cost of sales

Basic Marketing ROI Formulas

One basic formula uses the gross profit for units sold in the campaign and the marketing investment for the campaign: Gross Profit Marketing Investment Marketing Investment You can also use the Customer Lifetime Value (CLV) instead of Gross Profit. CLV is a measure of the profit generated by a single customer or set of customers over their lifetime with your company. Customer Lifetime Value Marketing Investment Marketing Investment However, some companies deduct other expenses and use a formula like this: Profit Marketing Investment *Overhead Allocation *Incremental Expenses Marketing Investment *These expenses are typically tracked in Sales and General Expenses in overhead, but some companies deduct them in ROI calculations to provide a closer estimate of the true profit their marketing campaigns are generating for the company. The components for calculating marketing ROI can be different for each organization, but with solid ROI calculations, you can focus on campaigns that deliver the greatest return. For example, if one campaign generates a 15% ROI and the other 50%, where will you invest your marketing budget next time? And if your entire marketing budget only returns 6% and the stock market returns 12%, your company can earn more profit by investing in the stock market.

Finally, ROI helps you justify marketing investments. In tough times, companies often slash their marketing budgets a dangerous move since marketing is an investment to produce revenue. By focusing on ROI, you can help your company move away from the idea that marketing is a fluffy expense that can be cut when times get tough.

Best Case
You measure and track the ROI of all of your marketing investments. Your campaigns deliver the highest possible return and youre able to improve them over time.Your organization understands and agrees with the choices you make because theres solid data to support your investments.

Neutral Case
You calculate ROI on some investments, but because it can get complex, you dont attempt to measure it at all times.You have a general idea of how your investments perform relative to each other, but you cant pinpoint the exact return youre generating. And in tough times, your budget is cut.

Worst Case
You dont measure the performance of any of your investments.In fact, marketing is viewed as a cost, not an investment at all.Your company isnt sure what works and what doesnt, and its a struggle to meet goals.

Marketing ROI Key Concepts & Steps

Before you begin Its a good idea to measure ROI on all of your marketing investments after all, youre in business to earn a profit. If your sales process is long and complex, you may choose to modify or simplify your ROI calculations, but a simple calculation is more useful than none at all. Confirm your financial formulas There are several figures youll need for your ROI calculations: Cost of goods sold (COGS): The cost to physically produce a product or service. Marketing investment: Typically youd include just the cost of the media, not production costs or time invested by certain employees; however, in certain cases it may be better to include all of those figures. Revenue: It can be tricky to tie revenue to a particular campaign, especially when you run a variety of campaigns and have a long sales process. Your finance team may have some suggestions for estimating this figure. Companies calculate these figures differently, so confirm the formulas your company uses your finance team or accountant can guide you.

Establish an ROI threshold Set an ROI goal for your entire budget and individual campaigns; set a floor as well. By doing so, you gain more power over your budget. If you project that a campaign wont hit the threshold, dont run it; if you cant get an ongoing campaign over the threshold, cut it and put your money elsewhere. Set your marketing budget When you have an ROI goal and annual revenue/profit goals, you can calculate the amount of money you should spend on marketing just solve the ROI formula for the investment figure. Youll be more confident that youre spending the right amount of money to meet your goals. Calculate ROI on campaigns; track and improve your results Tracking ROI can get difficult with complex marketing campaigns, but with a commitment and good
reporting processes, you can build solid measurements, even if you have to use some estimates in the process. Use your ROI calculations to continually improve your campaigns; test new ways to raise your ROI and spend your money on the campaigns that produce the greatest return for your company.

Over the years I have collected a variety of marketing formulas. I am giving you the formulas without any explaination. I know that won't be helpful and informative if you are new to marketing. This article is directed more to those of you who have read and studied everything there is to know about marketing to expand your thinking on what and how to share your message and hopefully in the comments you will share your secrets. I start with what you learned in college - the 4P's of marketing. Here's the summary from Wikipedia: Four P's In the early 1960s, Professor Neil Borden at Harvard Business School identified a number of company performance actions that can influence the consumer decision to purchase goods or services. Borden suggested that all those actions of the company represented a Marketing Mix. Professor E. Jerome McCarthy, also at the Harvard Business School in the early 1960s, suggested that the Marketing Mix contained 4 elements: 1) product 2) price 3) place

4) promotion

Seven P's As well as the standard four P's (Product, Pricing, Promotion and Placement), services marketing calls upon an extra three, totaling seven and known together as the extended marketing mix.[citation needed] These are: 5) People 6) Process 7) Physical evidence The 4 and the 7 P's of marketing were not that inspiring to me. They were descriptive but I couldn't create much of a marketing campaign or much of a marketing plan from them. It kept me looking for more answers. Web 2.0 New Marketing Four P's: 1) Personalization 2) Participation 3) Peer-to-Peer 4) Predictive modeling I liked this one! Good take on what is important in web marketing.

AIDA (S) AIDA is an acronym used in marketing that describes a common list of events that are very often undergone when a person is designing a marketing peice: A - Attention I - Interest D - Desire A - Action (S) - Satisfaction When I learned this one years ago, I thought there was something missing from the formula and I couldn't figure out what it was. That is what kept me searching for other marketing formulas.

Buying Process 1) Awareness 2) Consideration 3) Purchase 4) Loyalty Isn't that simple? I like looking at everything from the buyer's point of view.

WIIFM What's In It For Me? For years I studied psychology, influence, and persuasion to figure out how to motivate people to take action. Once I became aware of this formula I stopped studying all of that stuff and just studied what people want. This leads to a discussion of Maslow's Heirarchy of Needs.

From Joe Vitale Aristotle Formula: 1) Problem 2) Promise 3) Proof 4) Price Joe Vitale is great! He pulls abstract stuff from Aristotle and translates it into a formula. For years I went on this model even before I learned it from Joe.

The Updated Joe Vitale Formula 1) Promise 2) Proof 3) Price In his book "Hypnotic Selling" Joe explains how you don't have to rub the client's nose in the problem, they live with the problem. What they want to hear is the promise. They will get it if they are feeling the pain. I use this formula a lot.

From the Book "No More Bullet Points" by Cliff Atkinson Setting Dilemma Solution Close I had to extract this formula from the book. He didn't present it as a formula. He was sharing in the book that this is how Hollywood creates previews that pull us into the movie theatre. He says that all good stories center around a dilemma. That was enlightening to me.

From Sergio Zyman This is one of my favorite marketing mantra's

The purpose of marketing is simply to sell more stuff to more people more often for more money more efficiently.

More Stuff More People More Often More Money More Efficiently

This one is a powerful formula! I use it to teach my clients how to think about marketing. Not only is it the purpose of marketing, this is a sophisticated marketing strategy. Create marketing that will get one more customer to buy one more thing, come back and buy one more time, and spend one more dollar with ou while you spend one less dollar on your advertising budget. Mathematically speaking this adds a lot more revenue from the same number of customers. NLP Selling Formula 1) Establish Rapport 2) Identify Values 3) Create Value 4) Solve Buying Problems 5) Close the Sale

I was in professional sales for years and studied everything I could get my hands on. This NLP formula for sale really resonated with me and I still use it today.

Double A Double M - Back of the Napkin Marketing Strategy 1) Audience 2) Advantage 3) Media 4) Math I was looking for a way to simplify a marketing plan. I found that if I can identify these four elements (on the back of napkin), I have a marketing plan.

Y.U.M. Principle of Marketing You Understand Me This has been very helpful to my marketing way of thinking. When a person sees our marketing and says, "you're talking to me." That person will likely become a customer. "Made to Stick" Formula Simple Unexpected Concrete Credible Emotional Stories This is from the book "Made to Stick." I highly recommend it. The idea is to create a message that will change the thinking and the behavior of those who experience it. I teach hours of courses on these topics. We have a lot of fun with it. When I am helping a client put their marketing together I usually rely on the "Updated Joe Vitale Formula" (Promise, Proof, & Price). In his book "Hypnotic Writing" he shares some ways to be flexible with the formula and how to adapt it to the customer. I highly recommend using sales scripts for training purposes. Usually the owner is the best salesperson in the business. Depending on the product/service or situation I have the business owner

video his/her sales presentation and put it on their website. Nobody sells better than you. This creates consistency with every prospective customer and they get to hear it from the top. I have seen a dramatic increase in sales conversions when the owner writes down the sequence of their own presentation and writes out the main concepts in a story board fashion. It helps you to get an objective point of view on what you are saying and how it is being recieved.