This basic business question is one of the most overlooked in the world of small business and one of the most scrutinized in the world of large corporations. Because this is not a course on business economics but rather about how to build a successful online marketing strategy, we will try to keep this simple. However, it is critically important for you to understand how much money you can spend and remain profitable. It is also important to understand how those numbers change as your business scales.
For our purposes, what we really want to clarify is your marketing budget. Perhaps the most amazing thing about running an online business is that you can now track the ROI of money that you spend on marketing infinitely better than was ever possible in the world of traditional (offline) marketing. You can track every click and conversion and attribute that conversion to nearly any marketing channel.
Our goal is to build a machine that makes money. We want to pour money into one side and have more money come out the other side, and we can do exactly that. However, if we’re not careful we can also do the exact opposite! It is very easy to waste incredible amounts of money in online marketing… if you don’t do things the right way. So, one of the first things that we want to do is clarify the economics of your particular business.
Let’s be very clear, this is not a complete lesson in finance and you should seek the guidance of a bookkeeper and/or CPA about structuring your business finances.
At this point, if you happen to know what your profit margin is, then you can just provide that answer and skip this section.
For instance, if you have a 50% profit margin on an item that costs $100. Then at least we know where the line is drawn between losing money and making a profit. At that point we can use numerous marketing strategies in an effort to find the right mix that will maximize the profitability of your business.
From a purely marketing based perspective, the most important reason to understand the financial side of a business is to understand at what point the business is maximizing return on investment from marketing spend.
Enter your answers to the following questions into the “Business Economics” section of the Business Plan Workbook:
- List your fixed/overhead costs:
- Internet & Phone
- Accounting / Bookkeeping
- Legal / Insurance / Licensing Fees
- List your variable costs and how they change:
- Cost of Goods Sold
- Direct Labor Costs
- Customer Service
- Direct Sales
- Direct Marketing
- Web Development
- Web Hosting
- Revenue Projections: This is where things can get tricky and there are many valid ways to project future revenue. However, one of the safest ways is to not even bother attempting to project future revenues, but rather to simply identify your break even point, and once your business reaches profitability to take a look at what your profit margin will be after that.
Here is an example:
Let’s assume that your fixed costs are $20,000/mo.
Let’s say that your variable costs are $30/unit.
Let’s also assume that you sell your product for $100/ea.
In the above scenario, if you sold 300 units. Your variable costs would equal $9,000. Add that to your hard costs and your total costs are $29,000. However, at $100/ea, your net revenue would be $30,000 and your business would have just squeaked into profitability. Once that milestone is met, then your marketing budget can begin to open up and you can begin considering expanding your ad spend.
This information will be used later during the keyword and competitive analysis courses as well as during the SEM & Paid Online Marketing courses to determine both market capacity and projected ROI.
If you have questions regarding your financial projections or properly setting up your books it is strongly recommended that you contact a CPA. Nothing is more important than making sure that your business is built upon sound financial principals.
Every team has strengths and weaknesses and recognizing them will help you understand what you should keep in-house and what you should be outsourcing to make sure your business is growing efficiently.