Breakeven Analysis: The Math before you go Live

If you are going to buy leads or generate them yourself by sending traffic to a landing page that converts the traffic to a lead, you need to set up some basic metrics to measure your campaign. The math is very basic, simple, and it only takes a few columns on an excel sheet to give you a very clear idea of what is happening.

But before you ever sign an insertion order, you should set up the metrics on an excel sheet. If you were doing a CPM campaign (buying ad impressions) you would start out with the CPM, than estimate a click through rate, than you have a cost per click, than a conversion on click to lead, a price per lead, a conversion on lead to sale, cost per sale, margin on sale, ROI on Sale. After that, you must consider the lifetime value of the customer, to make it easy on yourself, estimate a life time value after the initial sale, in terms of net margin. Sometimes you do this analysis, estimating of course click through rates, and conversion rates, and you see off the bat that there is no way this campaign will ever work. Below is an example of pre-campaign breakeven analysis for a free giveaway of a financial DVD (Learn how to trade Forex in 20 Minutes while drinking Bud Light). The highlighted numbers are estimates.

I made this one purposely inconclusive. The three estimates here, CTR, Conversion click to lead, and Conversion Lead to Sale are more precise than you might think. If you have ever worked with the media before, for example, on a CPC campaign, you will already have these numbers in your data base. That is why, before you ever buy a CPM campaign from a media source, it is highly advisable to first do a CPC test, to see how the clicks convert to leads, and the leads to sales. If you plan your year well, you could run tests every month, and when those tests mature in six months (you know how well the leads converted to sales) then you can decide to roll out with a bigger campaign or not.

Let’s imagine that the conversion estimates are based on past CPC campaigns, which means they are quite accurate, is this campaign a go? Of course it is. Experienced direct marketers will all tell you that most campaigns bomb, and bomb badly. A campaign that can come close, as this one does, is a definite go.

For a good business person, this campaign, as is, is already a winner. Why? First year return is 38%, which is nothing to scoff at. There will be more sales down the road, the experienced eye here sees at three years an ROI of probably over 50%. There are many hidden columns in this spreadsheet, the farther the report goes up, the more columns you should hide. It is amazing how limited the mathematical skills are of many CMO’s, COO’s not to mention our beloved CEO’s, generally, the political skills that move one up the food chain don’t come with great theoretical abilities. Oh to have a metrics driven leader!

The real danger with this campaign, if you have already tested the media source on a CPC campaign is the CTR. Click through Rates can vary, but if you base your estimate on the same creatives used in similar media, and make the estimate conservative, you are probably okay. Always do this analysis with very conservative numbers, makes you look smarter and Murphy’s Law is always something to have in the back of your mind.

But let’s say your not to enlightened leader nixes the 5 grand test. Don’t despair; ask them what has to be improved to get the green light. Many will say they don’t want a campaign with a negative ROI on the first conversion event. Sharpen your pencil and call you account executive who is hopefully dying to take you out to dinner, just needs a IO from you. Time to squeeze their ever so delicate genitals; I had an elaborate mime for this that my reports loved.

Remember all the columns you hid, those columns had the ROI by each creative. You will find that some creatives will give you much better ROI’s than others, by skewing the campaign toward those creatives (text links, text links, text links) you bring down the over all CPM considerably. After bit of squeezing, here is the new spread sheet.

Now we are at breakeven on the front end, over 50% at 12 months, and probably somewhere over 70% after two years. If they were only all this easy. They are not, but that is why when you get one like this, a good fish on the line, you must work it till it becomes a winner. If a direct marketer bats .300, he is in the big leagues. That means 70% of his tests are losers. Keep that in mind.