How Promotions Can Affect Your Company’s Profits
Are you contemplating doing a big promotion to increase sales at your company? Before you get started, you need to ask yourself an important question. Will the promotion increase company profits?
At first glance, it seems the obvious answer would be yes. You will have increased sales, which usually translates to increased profits. But, will it be true with this promotion?
Promotions cost money. Let’s take a quick look at an example.
An insurance company decides to have a promotion to increase leads. They put together a small bundle of giveaways, including ink pens, calendars, cloth bags, and a grand prize of a weekend at a nice Bed and Breakfast. They decide to advertise the promotion using Facebook ads and Google ads.
The cost of the giveaway items is nearly $5,000. The cost of advertising ends up being just over $2,000. The extra time required by employees cost approximately $1,000. Their total cost of the promotion was $8,000.
In this case, they did receive enough new leads and business to justify the cost of the promotion. But, that is not always true. If they had received just a few less leads, or the leads did not convert to sales, they would have lost money.
You need to start any new promotion by evaluating your costs and your expected response. You do not want to assume you will make a profit. Smart marketers will do a small test of their promotion to see what the response rates will be, so they can get a better estimate on costs and potential sales.
You can test your ideas by setting low budgets for your ads on Facebook or Google. This allows you to evaluate your click-through rates and conversions without spending thousands of dollars.
You should also test your promotional ideas. You want to make sure your promotion does not grab the interest of freebie addicts who have no intention of buying. Many marketers use books, or other giveaways, that provide information their target market is interested in. This makes sure only people who are prospective clients will sign-up for their email lists and promotions. You will get less leads, but they are higher in quality.
What other factors should you be concerned about?
Make sure you know your numbers. How much lifetime profit do you expect from a new client? In the insurance industry, a new customer has a high value. They usually stick with an agency for years, which means the agency gets annual profits without a lot of extra work. This is not the case in many industries. A real estate agent gets higher profits from a single sale, but the customer does not provide repeat annual earnings.
When you evaluate the numbers, you need to use your past history to determine how many leads it takes to make a sale. You can use these numbers to estimate if your promotion will make money. Let’s take a look at an example of figuring the cost.
We will use simple numbers to make this easy. The cost of a lead from the promotion is $50. Your company averages converting 1 lead out of 10 into a sale. The lifetime profit from a new customer is $2,000. In this example, It will cost your company $500 to make one sale. Since a new customer provides $2,000 in lifetime profits, you can expect around $1,500 in company profits. Keep in mind, those are not instant profits. It may take several years to realize the profits
Do promotions increase your company’s profits? The only correct answer is maybe. You need to evaluate each promotion and decide if it looks promising or not. The one thing we know for sure, if you do not promote your company, you will not succeed. Study your ideas and choose promotions that are cost effective to grow your business.