After talking to many business owners and I.T. Execs here in my area, I’m convinced most don’t understand or see the change that is taking place and think Social Media is a waste of time, a fad. Most are bottom-line thinkers and there must be a result for ever action taken, an immediate return on investment. They say I don’t have time for that sh*t! It puzzles me how those who think in these terms consider themselves Revolutionary thinkers, Visionaries in their respective fields. It would seem to me that this is the ultimate oxymoron. These individuals understand bricks & mortar better than most but they struggle with the soft side of what’s happening with Social Media and refuse to believe that it has any influence on the bottom-line.
How could it be that these brilliant minds are missing the shift, unwilling to accept that their roles will be obsolete as they know them. The argument is valid, someone must do the work, and, someone must be in charge, well, sort of. The Executive(s) that understand we the people are going to tell him what and how things will go will win, he must listen and listen hard before making a final decision. I’m not saying dismantle your hierarchy right this minute, I’m saying prepare to allow for a flattening of management and an empowerment of your staff unlike anything you’ve planned for in the past. Open yourselves up to bringing strategic I.T. and Social Media consultants (thinkers) in to help guide and wade through this new environment, this new era of Social Media and what it will mean to you and your business. How 50 Billion Dollar Marketing Dollars will go to firms that are smaller and can move faster than the bloated organizations we know today.
There will still be a need for large ERP systems and the like but they too are changing, as we move towards Virtual Reality and Nanotechnology, these environments are being built via the Cloud today rather than in big rooms with SANS and mainframe like servers. In the future we all will be wireless device’s, we will integrate with technology, in some ways we already have, manual processes will disappear in such a way we won’t see it coming. This isn’t fear mongering, this is asking you to look outside of your four walls and take notice of what’s really going on with technology, spend time looking ahead and consult with those who can help you see what you can’t see now.
I.T. Exec’s – The Time Is Now! You may even be too late in some circles, much needs to be done and you need to get started if you haven’t already. Don’t do things in a vacuum or you will stay inside your four walls and try to use old thinking to get you of your Executive Box. I know most of it seems logical but trying to put an ROI to conversation(s) is confusing at best when you try to get there using traditional equations. There are some sharp people who can help you and you must be willing to allow them to lead you through the maze, if you are looking for someone in your area let me know and I’ll get you connected.
I could go on and on but I think you’re getting the picture, get outside the box and ride the wave rather than be whipped out by it!
In July I wrote an article for you called, ” Your Break Even Point “. The premise was to help you calculate that number and for you to have a better understanding as to why you might be loosing money everyday and not know why. Your business depends on you knowing! I mean it’s not something real obvious because it’s kind of hidden, if you don’t have the right indicators in front of you everyday you won’t see it. Hopefully you were able to figure out what those indicators might be and you are monitoring them daily. I’ll assume you’ve done that because next I want to walk you through an advertising slash marketing concept with you.
Years ago when I was selling Radio Advertising we used a thing called Return On Investment Selling, it was an education and very interesting. The program was to show how you would be able to pay for a new ad campaign and make money too! Yep, pay for the advertising and make your desired ROI, sounds to good to be true right? Well….yes & no. Let me lay out a scenario and we’ll walk through this together, I think you will find it most interesting.
I’ll change the names and places to protect the innocent, just kidding. I’m going to take you through a simple Growth Objectives equation and an Investment Analysis so you can understand the number at the end when I’m finished. Oh, and the Forward Slash ( / ) means Divide By in my equations if I don’t use the ÷ Symbol, I thought I should clear that up right upfront 🙂
Let’s pick a market, let’s say you are in the furniture business and the Market Potential was say 5 Million Dollars. That means 5 Million Dollars in business is being done in the Market your business operates in. Lets keep it simple and say you have a present Gross Sales figure of $500,000. That means you have a 10% market share. But you want to realize a growth objective of $100,000 out of your market, what kind of additional penetration do you need to achieve your goal? You would need 2.2% more, here’s how I figured it out:
100,000 ÷ 5,000,000 – 500,000 = 100,000 ÷ 4,500,000 = .022 x 100 = 2.2 (actually 2.222222)
If you’re struggling with the equation, get your calculator out and punch it up. It works.
So now we know the Penetration needed to reach a $100,000 Growth Objective in your Furniture market. Next I’ll break down how many customers or prospects it will take per day to achieve your goal of One Hundred Thousand Dollars.
To make this equation work we will need to know a few things first before it will work. We need to know what the average customer worth is in your store, how much each customer spends in your store. We also need to know what your closing ratio is, a great way to see how well your sales staff produces I might add.
For the purposes of this exercise I’ll use an average customer worth of $1,000 and a closing ratio of 40%. That will keep the numbers easy to work with. The equation is somewhat simple, I’ll try to lay it out that way.
$100,000 / $1,000 = 100
Growth Objective / Avg. Customer Worth = Additional Customers Needed
100 / 40% = 250
Additional Cust. Needed / Closing Ratio = Additional Prospects Needed
250 / 312 = .08
Additional Prospects Needed / # of Selling Days (Days Open) = # of Prospects per day
Is the number of prospects needed realistic? Yes No
This is only part of the equation, this merely tells you how many prospects per day you would need above and beyond you current customer base over the course of one year or 312 business days.
OK, we now know what the daily number is, but it still doesn’t tell us what the additional Gross Profit is going to be. Well, if your Growth Objective is $100,000 we now need to multiply it by the Average Gross Margin. Let’s use a simple number and one that might be realistic, let’s use 25%. Using our numbers from above this is how the equations looks:
$100,000 x 25% = $25,000
Growth Objective x Avg. Gross Margin = Additional Gross Profit
So in order to achieve the additional gross profit of $25,000 you were going to need to make $100,000 more (above and beyond) in business over the next year. We figured out how many new prospects / customers it would take to hit that number (0.8 per day) and we felt it was realistic. Now, what kind of ROI did you want to achieve, I’ll assume you wanted 100%! You want to make $100,000 in additional business which would give you an additional gross profit of $25,000 and you want a return of 100%, right?
The question begs to be asked…..HOW?
Well, obviously you would have to do something different than you have been doing to achieve that fine 10% market share. You want to grab 2.2% more of that market right? That means you have to do something above and beyond what you are already doing in your advertising efforts. You WILL have to put more advertising dollars into achieving your goal of 12.2% Market Penetration, your $100,000 Growth Objective and put the additional $25,000 Gross profit in your pocket.
The ROI I’m talking about is what you have to spend in additional advertising dollars to make it happen. You are probably asking yourself how you figure out how much to invest in advertising dollars. the Investment Analysis is quite simple. Here’s the equation:
Desired ROI is 100%
$25,000 / 1 + 1 = $12,500
Gross Profit / Desired ROI as a Decimal (1 + 1) = Maximum Additional Advertising Investment
25,000 ÷ 2
So, you want to get 100% of your advertising investment back, you will spend $12,500 in new advertising dollars plus make $12,500.
You will Invest $12,500 in additional advertising to realize the Growth Objective of $100,000 in additional revenues that will produce and directly impact your bottom line by an additional $25,000. Cool & achievable based on the above numbers.
The above is an over simplified view, achieving a market share growth of 2.2% on top of the already acquired 10% market share is not easy, the numbers don’t tell the whole story. Now you still have to go through the process of doing the creative, copy, layout and cross promotional stuff but now you an idea in advance the hill or mountain you may have to climb.
I hope this helps you when you get the notion to grab more market share, do your homework and crunch the numbers. You will have a much better picture and it will allow you to enjoy the process of achieving it. Keep this in mind the next time your advertising sales rep wants to up sell you. If you want more real gross profit you will invest to get it, it’s a fact of life. Just make sure it fits your goals, think with the end in mind and work hard to reach it.
Until next Time.