Are you happy just to get more sales for anything you sell? You better think twice. You might be missing out on lots of potential profit…
More responses aren’t always better, so you gotta figure out when they are.
You have to figure out each new response’s opportunity cost. Let me give you an example.
A few years ago I worked with my family friend in his DJ business. Once an uncle of mine asked me if my DJ friend was free to DJ their event. It was wedding season but this event was just a small party. Not worth much. I ended up booking the event for him.
Later on my DJ friend received a couple more calls to do weddings on that day, both of which he had to reject because he had to DJ my family friend’s small party and none of his DJ “coworkers” would take the gig. Weddings are worth a lot more, so this early response cost him hundreds of dollars.
The opportunity cost of this response was higher than it’s return.
In my tutoring business I sometimes booked clients that were too far from others. The driving time would prevent me from packing more hours in a day, so I would lose money.
So think about the opportunity cost of each new response. Put a dollar amount on the cost per response for each type of product/ service you sell.
For example, suppose you have a business selling hair styling services. You have the following rates of profit (revenue minus costs) for each service you provide:
Color & Style: $75
Basic Hair Cut: $25
Suppose your direct marketing sends out 2500 of one “catch all” flier, and you get back response rates like this:
Perm Requests: 2% (50 a month)
Color & Style Requests: 1% (25 a month)
Basic Hair Cut Requests: 1% (25 a month)
For continuous simplicity’s sake, lets say you can only give 125 services per month. That means you can increase your sales by 25 before you max out.
In order to accomplish this you spend $50 more to send out 500 more fliers this month, and get back response rates like this:
Perm Requests: 2% (60 a month)
Color & Style Requests: .83% (25 a month)
Basic Hair Cut Requests: 1.3% (40 a month)
So you made an additional $750 in profit ($800 revenue-$50 ad costs) this month. Great. except…
A similar competitor, who just needs 5 more clients, changed 1250 of his 2500 mail-out fliers (Advertising costs didn’t change) to specifically sell the color and style service, and received these additional response rates:
Perm requests: +0% (no additional this month)
Color & Style Requests: +.48% (15 more this month)
Basic Hair Cut Requests: -.4% (Lost 10 this month)
That’s $875 in profit ($1125 – $250), and with no additional marketing expenses, and still room to grow.
So now you see how the profit weight of response rate for each type of service you sell is different.
One way to measure your overall “profit adjusted” response rate is to put multiply each rate by its “marginal profit of sale (mps)/highest marginal profit per sale (hps)” ratio
In your hair styling services example above, we got marginal rate of profit, it’s actual profit per sale, for each service above. The highest marginal rate of profit is for color & style requests at $75 because its yields the highest profit. Now here’s each service’s “mps/hps” ratio:
Perm Requests: 2/3
Color & Style Requests: 1
Basic Hair Cut Requests: 1/3
so now your “profit adjusted” response rate for your ads is 2/3*(Perm response rate) + 1*(Color & Style response rate) + 1/3*(Basic Hair Cut response rate). In our example above, here’s how “profit adjusted” response rate looks before and after each campaign:
Before: (2/3(.02) + 1(.01) +1/3(.01))*100% = 2.66% profit adjusted response rate, instead of 4%
After: (2/3(.02) + 1(.0083) + 1/3(.013))*100% = 2.6 % profit adjusted response rate, instead of 4.16%
Its actually less after.
If you multiply your mps/hps ratio to each of your individual response rates, you’ll get a much clearer picture how much each response rate is worth to your overall response rate.
Do this for fun and profit. 🙂