It’s called the breakeven “allowable” and it’s handy for all kinds of things in our business.
For a brand new program we use the allowable to tell us if we have a viable business or not. That can save a lot of money up front.
When we’re considering something new for an existing program, the allowable tells us exactly how much of a lift we need from the new element.
We refer to it almost every day and we fine tune it, rework it and generally use it as our guide, our north star. We even use it to help set prices for products and services.
On one level, the marketing allowable tells you how much you can spend on marketing efforts to get one sale and break even.
The formula is deceptively simple: R-C=A, which means Revenue – Costs (not counting marketing costs) = Marketing Allowable. That means how much money you can spend in marketing to generate one order.
The reason for focusing on one sale is pretty obvious: everything is a multiple of one.
“Costs” means the cost to you to deliver one order of your product or service (and “freebie” if applicable), handle the order taking, order processing, shipping, response management, customer service, complaints, bad debt, returns and so on.
“Revenue” refers to all the money customers pay you, including shipping and handling charges, when they buy your product or service.
If your costs are $11.50 to deliver and service one order and your revenue is $23.50, then you can afford to spend $12 in marketing to get one order.
If you can afford a marketing budget of $100,000,(excluding onetime costs such as research, planning and creative development) then you must get $100,000/$12 = 8,334 orders.
You then look at media costs. Let’s use print as an example. (These numbers have nothing to do with reality. They’re just for demonstration.) Assume that an ad of reasonable size costs $20/M. You can “buy” a circulation of 500,000 with your $100,000. You need 8,334 orders. That’s 1.67%, too high for print so you look for alternatives, applying the Breakeven Allowable whenever you consider costs and reach.
After a while, using the Allowable becomes almost automatic. Which it should be.
