Christopher S. Penn : Awaken Your Superhero » Money

Cash flow is king

Christopher S Penn — Tue, 03 Jan 2012 11:52:30 +0000

I’ve been playing World of Warcraft now for almost 4 years. For the insiders, I started right before the Sunwell and patch 2.4.2. One of my absolute favorite parts of the game is playing the in-game market, the Auction House. This is a live commercial exchange where you can sell your goods to other players and vice versa in a digital bazaar of sorts. Some of the best business lessons, some of the most important business lessons, can come from playing this aspect of the game.

One of the most basic but most powerful lessons about this aspect of the game is that when it comes to running a business, only one things matters: positive cash flow.

I switched realms recently to the Earthen Ring. In my first 30 days, I had to restart my Auction House businesses from scratch. The first step to doing so in-game (and in real life) is to get some working capital, some starter money. In order to be able to buy and sell, you need cash. Fortunately, as in real life, there are decidedly unglamorous but profitable jobs you can take. Here, for example, is the Jaggedswine Farm, outside the gates of Orgrimmar. When you kill these pigs, you get a chunk of boar meat.

Boar meat is decidedly uninteresting. It’s unexciting. However, in order to level a character’s cooking skill in game, it’s a necessary ingredient. Thus, a lot of people need it, even if they don’t want to get it themselves. Combine a boring, time-consuming task with a demand for the finished good, and you have the opportunity to make some money.

Once you get some starter capital, building your fortune becomes a matter of making smart deals and keeping cash flow positive in your in-game professions. In the case of one of my characters, it’s about keeping my costs for producing glyphs from exceeding the profits. I know how much the supplies for my profession will cost me. I know roughly what the finished goods will sell for. If I can keep cash flow positive, then there’s no limit to how much I can grow my business. Conversely, if I have negative cash flow, no matter how much I sell my items for, I will lose in the long run.

Cash flow is king. If you on a personal level are not cash flow positive, you need to fix that as soon as possible. Go start doing some affiliate marketing. Ask for a pay raise at work or change jobs if you’re able to do so. Publish a book for sale – it costs nothing besides time and an Internet connection these days. Whatever you do, get earning more than you’re spending.

This is the core business lesson that the Auction House teaches us: unless you consciously choose otherwise, always be making a profit. Always be spending less than you’re earning. Always be minimizing expenses while maximizing profits – and focus on maximizing profits so that you can grow. Cash flow is king. Cash flow is the lifeblood of your business, and as long as it’s positive, the world is your oyster.

Or boar. Mmm, boar.

No actual animals were harmed in the writing of this blog post. A whole bunch of digital boars got mercilessly slaughtered, however, and their innards sold for 4 gold, 37 silver.

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How to get started with affiliate marketing

Christopher S Penn — Mon, 05 Dec 2011 13:23:35 +0000

Lots of people want to make a little extra money, and affiliate marketing is one of the simplest (remember that simple != easy) ways to go about doing it. If you’re interested in adding some beer money to your bottom line, consider getting started in affiliate marketing. Here’s a step by step tutorial on getting started with one of the most well-known and reliable programs: Amazon Associates.

Amazon will pay you around 4% of any item’s sale price for stuff that’s sold through your tracking links. Obviously, unless you can sell a whole bunch of MacBook Pros, this is going to be solely in the realm of beer money and not mortgage money, but every little bit helps.

Take note that you don’t need anything other than a mailing address and basic financial information to sign up – no inventory to manage, no having to do anything other than recommend stuff you like.

You’ll start by signing up for a free account. Once you’ve gone through the basic account process setup, it’s time to start putting together things you want to talk about.

When it comes to affiliate marketing, or any marketing for that matter, your best bet for long term success is to market things you already use, love, and want to talk about, things you’d recommend even if you weren’t getting paid. Why? From time to time as an affiliate marketer, you’ll get customers of your affiliate program asking you about products – and if you own them, you can help them. You can also make honest, true recommendations about the products and services you market because you already own and use them.

Once you’re signed up, create an aStore – one of my favorite ways to showcase the things you want to talk about and share. Use Amazon’s built in guide to get going, by setting up a tracking code:

Then by adding products individually or by category to your store:

After you’ve picked the things you want to market, configure the store to wear your colors and logos. When done, hit publish and your store is live and available to the world:

Now you’ve got your own electronic store online without a square inch of inventory or real estate.

Decide how you want to share it – with a simple standalone link, or embedded on your web site/blog.

You’ll also notice when you’re browsing Amazon and logged in that there is now an affiliate toolbar above each product or service. This gives you quick links to use for things like newsletters or blog posts. Any time you reference an Amazon product, you should use these links rather than just the URL of the page.

Don’t be lazy! Use these links for the extra few seconds it will take you to copy and paste them rather than the URL in your browser. Why? One of the great benefits of Amazon is that if someone reaches the site during their session from one of your links, everything they buy during that session counts towards your affiliate marketing profits.

For example – and this is real – one of my referral fees from this quarter was for condoms. I don’t market or refer to them anywhere on any of my digital properties (except for this post, I guess), but because someone bought them while browsing Amazon from one of my links to a different product, I get credit and $1.11 in referral fees.

Incidentally, this is also some interesting market research to tell you what else your existing customers like.

Affiliate programs are a great way to start earning some beer money, some extra cash, and if you find you have a knack for it, you can earn a lot more than beer money in time, but this tutorial and guide should help you get started with your first program and help you decide if you enjoy affiliate marketing.

Good luck, and please let me know your results in the comments.

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Not another dime: a protest that works

Christopher S Penn — Thu, 10 Nov 2011 13:15:05 +0000

Please consider the following:

This, ladies and gentlemen, is the protest that works.
This is the protest that actually wakes up the powers that be.
This is the protest that generates results, that generates real change.

It’s the protest that says:

I do not believe in you, therefore I do not do business with you. Not another dime until you change your ways.

You want to change corporate America? Do not do business with companies you don’t believe in. You don’t like X company’s labor practices or wage practices or environmental practices? Don’t buy another thing from them. Find someone else. This is the age when you can Google for nearly everything and probably find 5 alternatives online that are cheaper, better quality, or more environmentally friendly.

You want to change the rule of big banks? Do not lend them your money. Find a local credit union or community bank and bank with them instead. Check out mycreditunion.gov to find one near you, then go close your account with the big bank and do business elsewhere.

You want to change the tone and tenor of Washington politics? Do not give a dime to any candidate running for office, period, because the electoral system is funded by individual donations as well as large companies. You want to make real change happen with your money? Skip the political candidate and donate to the local food pantry instead.

On a big picture level, the ballot box certainly is one of the most powerful tools that a citizen of a country (if they have the right to democratically elect their leadership) has access to. But on a day to day basis, there’s an even more powerful tool: your wallet. Make conscious choices about what you believe in and support those choices with your money. Encourage others to do so as well. You don’t need to convince everyone, just 4-5 friends and colleagues to make similar choices.

When you choose to stop doing business with someone, let them know why. Send them an email. Post it on their facebook page. Write up a blog post. Say to them very publicly and succinctly, with substantiation or citation of the facts you used to make your decision, here is why I am not giving you another dime. Hashtag it #notanotherdime or something like it so that others can see you and join you.

As evidenced by the powerful protests above, it does work.

Disclosure: I’ve been banking with a credit union since 2001. I do not hold investments outside of index funds in any banks.

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My visit to Occupy Boston

Christopher S Penn — Mon, 31 Oct 2011 12:57:09 +0000

Yesterday, I paid a visit firsthand to Occupy Boston, the local branch of the Occupy Wall Street movement. I’ve been writing and talking about economics and politics for a while and about the Occupy movement, so I figured it was time to do some primary, field research and go there myself. So what did I find?

First, the Occupy movement is certainly diverse. Take a look at this short, incomplete laundry list of issues:

Corporate taxation
CORI/Background Check Discrimination
Workers’ Rights
Violence
Murders
Gun Laws
Foreclosures
Political Corruption
White Supremacy
Disparities in Education
Budget Cuts
Racism
Bank Bailouts
Voter Fraud
Affordable Housing
Corporate Crime
Fraud
State/Individual Sovereignty
Foreign Wars
Religious Intolerance
9/11 Conspiracy Coverup

The criticism that the Occupy movement doesn’t stand for anything is patently false. The reality is, based on conversations I had and the piles of brochures and other things I was given by volunteers is that the Occupy movement stands for far too much, so much so that it doesn’t know what it is.

That’s not necessarily a bad thing, but the movement completely lacks focus. With a laundry list of issues that long, there has to be some common ground. For example, people cited Arab Spring in conversation, but they neglected to realize that Arab Spring movements had a very clear set of targets: Hosni Mubarak, Muammar Qaddafi, etc. In each case, the target was the incumbent sovereign government that created conditions of structural inequality or injustice.

The second takeaway from Occupy? They’ve done a good job of identifying the problems (as you can see from the partial list above) that are totally valid and worth addressing. But because they have no common focus, no common ground, they also have no set of solutions to advocate for. Again, going back to Arab Spring, the common ground was clear: get rid of the guy in charge. I talked to two volunteers (who requested that I not reprint any identifying information) who, when asked how they’d solve the problems that Occupy is addressing, shrugged and said that they weren’t sure, but something had to be done.

A third volunteer said that we had to end corrupt government, end the power of corporations, and redistribute the wealth accrued by our corporate/government complex. When I gently suggested that that was the effective goal of communism, the gentleman I was talking to loudly protested, “I’m no goddamn communist. I’m a ****ing American!” I gave up at that point trying to explain that communism was an economic system, not a political one, and that communism can work on some scales and in some contexts. (Israeli kibbutzim are one such example of successful communism)

This is the third takeaway from the Occupy movement, one they’ve self-identified as an issue for their members. In order to more effectively articulate what’s wrong and what needs to be fixed, they need to get better educated about economics and politics. Of the five people I talked to, none had even a basic grasp of the difference between Keynesian and Austrian economics, which are the two effective viewpoints being promoted by various political sects today. For those not keeping score, the Democrats tend to lean more Keynesian, and the Republicans (especially Ron Paul’s ideological base) lean towards Austrian.

The bottom line for the Occupy movement is that it’s got a lot of energy. The people in it have their hearts in the right place as the political, economic, and social issues at the heart of the movement are very real. That said, it needs to get better educated and better marketed in order for it to resonate deeply with the average person and give them something to aim their discontent at.

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You get what you sell for

Christopher S Penn — Wed, 17 Aug 2011 23:41:42 +0000

There’s an old, worn-out adage: you get what you pay for. The explicit lesson is that quality or quantity cost money, cost resources, and the more resources you expend, the more of whatever you’re buying you should get.

There’s a flip side to this adage: you get what you sell for; that is, if you don’t ask for someone to buy something, you’ll never sell anything. I want you to think carefully about a couple of social networking utilities right now, Klout and Empire Avenue.

Klout:

Empire Avenue:

There is an implicit message here. These networks, which essentially try to offer a way to assess your social media influence, are asking you to make a deal:

Trade money for influence.

Don’t believe me? Think about the statement that we started with: you get what you pay for. If you want influence, these networks are asking for your participation in social networks. The more you participate, the more influence you garner. In order to prevent easy gaming of their algorithms by mass adding friends and followers, they focus instead on activity, activity on content-based networks like Flickr, YouTube, Instagram, Blogger, and more. The more activity you generate, the more influence you theoretically garner.

Of course, all that content and activity you generate has to have at least some level of value in order for people to want to engage with you. There has to be some value to the photos you post on Flickr (uploading endless blue squares would be ineffective), the videos you post on YouTube, etc.

In order to “buy” influence, you must trade it with content of value. Now we introduce opportunity cost. Every time you publish your photo to Flickr instead of Fotolia, you trade influence for potential revenue selling your photo online.

Why buy this photo when you can get it at no cost through social media?

Obviously, there are no absolutes; you can sell stock photos online and still present some version of them on Flickr. You can create stock video and still have fun clips on YouTube. That said, if you’re hunting for clip art for your corporate newsletter, which would you prefer in lean times, a no-cost Creative Commons licensed work or a paid licensed work? That choice is easy – and unpleasant for content creators trying to be compensated for their work.

For the many people who are just getting started in social media, the initial bargain seems to indicate that giving away everything, trading away everything, in exchange for influence is the way to go, and very few people will contradict that initial impression. There is a balance, but very few people are aware of it or are willing to promote the balance between valuing influence and valuing commerce.

Take a few moments now, close the browser window in which you obsessively refresh your Klout score, and ask yourself what you’ve traded for influence. Ask yourself what you’ve gotten in return, and ask yourself if it’s been financially worth it.

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Are your social media networks supporting goals?

Christopher S Penn — Thu, 14 Jul 2011 12:34:27 +0000

Looking at how everyone is trying to find a place for Google+ and all of the other networks, I thought I’d share the way things are shaping up and how I use them. You might find a few ideas you can use.

I look at social media sites from the perspective of what they do and where they fit in my “funnel”. Before we talk social, I should explain that I have 3 business goals I want to achieve with the stuff I do online.

1. Grow my database. Jeff Pulver says it best: we live or die on our database. For me, this means bringing people onto my mailing list and into networks that let me keep my data, such as LinkedIn. This database is a tangible asset – it’s helped people get jobs, supported the next two goals, and done some amazing stuff all on its own.

2. Book paid speaking opportunities. Pretty straightforward.

3. Sell stuff. Whether it’s copies of the Marketing White Belt book, the handful of affiliate programs I participate in, or generating leads for my employer, WhatCounts email marketing, I want to create additional revenue using the digital platform I have.

Ultimately, if the things I’m doing don’t support at least one of those three goals, then it’s probably not worth doing – or it gets bumped to the back burner constantly in favor of things that matter.

If you are using social media for business purposes, do you have a set of business goals that guide your social media work? If not, then please save this blog post to Instapaper or Evernote, close your browser, and don’t post a single thing on Twitter/G+/FB until you have those goals written out. Your goals and my goals will be different! For example, if you’re unemployed, one of your goals is likely “find work”.

Obviously, if you’re using social media for personal and non-commercial purposes, your goals should be different but equally meaningful, otherwise you’re likely to get caught in a giant time suck.

So, with these goals in mind, how do the networks shape up now for me?

The nifty icons are from the socialize icon set.

Twitter: great for discovery of new people, which in turn feeds goal #1. Twitter is now about discovery and crossing networks/niches/fishbowls for me. It’s become the standard currency of influence for the moment until G+ releases its API. Twitter is how I find the new folks to bring into the network. Assuming I prove my value to them, they flow into goal 1 pretty seamlessly.

Stumbleupon: the dark horse of social networks. I use it, and more important, other people use it a lot, for discovering new websites. That in turn drives traffic to the website, which supports goal #3 heavily.

Google+: G+ has been a lot about engagement of an existing base. That said, because it’s an asymmetric network, there’s discovery happening there, so that does feed goal #1. Whether it will support goals 2 and 3 is yet to be determined, though I am starting to see it as a major traffic source.

LinkedIn: LinkedIn is the money network for me. It’s consistently been a powerful force behind a lot of what I do, and it’s an easy place to create social currency. Every time I forward a job request on or connect two people who should be connected, I pile up social currency, which in turn feeds all 3 goals. I’ve booked paid engagements right off LinkedIn, and its database is downloadable to feed the other databases.

Facebook: Facebook’s not doing much for me right now. It’s too siloed, too walled off to be of much benefit for SEO, doesn’t push a ton of traffic, and what it does push tends to be of low quality that doesn’t feed any of my goals especially well. I use Facebook personally to keep up with friends and acquaintances, but for supporting my business goals, it’s been a bust. Maybe my audience isn’t there or isn’t interested in behaving like my crowd while there. Whatever the case is, it’s not working for me.

A few folks responded in the Google+ thread about which networks were working for them; experiences differ I suspect largely because our respective audiences and goals differ as well.

Take some time to think about what’s working socially for you in relation to goals that matter to you. If your social media participation isn’t supporting them, either you need new goals or you need to pivot and change up what you’re doing in social and where.

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Dark economic times ahead?

Christopher S Penn — Tue, 07 Jun 2011 03:46:52 +0000

Are you good at putting together the pieces? There’s a lot going on in the world, and individual pieces may not seem like much, but put together they can create an attention-getting picture. Here are a few pieces you need to put together right now.

1. Europe’s financial system is crumbling. Specifically, the European Union’s interstate monetary system is on the verge of a meltdown the likes of which we have never seen before. Tune into any financial news network for the latest. I prefer Bloomberg, personally.

2. The United States economic recovery is slowing down because the Federal Reserve has stopped pumping trillions of dollars into the economy for free. (incidentally, this is a great article that explains what the banks did with the money)

3. Our biggest export markets include China and Europe. China has already put the brakes on its economy to stem inflation. That’s one of the many reasons why the “recovery” hasn’t really felt like one, and why so many of your friends and colleagues are still looking for work – without a healthy increase in exports, US companies aren’t selling as much, which means we aren’t making as much, which means we aren’t hiring as much.

4. The fractional reserve rate requirements in the US are about 1%; in Europe, about 2%.

The bad news is this: because the world’s economies are so interlinked, because our financial systems are so interdependent on each other, the house of economic cards is extremely vulnerable. Not only that, but between banks leveraging themselves out the wazoo and consumers not experiencing any meaningful wage growth (which means no increased consumer spending), all it takes for a massive financial crisis (bigger than 2008) is one solid system shock.

How solid a shock are we in for? We’ve never seen an entire continent unified under one monetary system like the EU, which means we’ve never seen a system failure of that magnitude in modern times. That appears to be in the cards in the next year or so, unless the EU volunteers to break itself apart, which seems fairly unlikely. How big does the shock need to be? Just enough to overwhelm the fractional reserve requirements.

What should you be doing personally? Whether you’re a citizen of the US, the Americas, the Eurozone, or anywhere else, realize that we are all (for good or ill) in this together, and when things go south with the European financial crisis, the shockwaves will be felt everywhere in the industrialized world.

Cash is your friend for operational expenses like daily life.
Reduce the amount of debt you carry if you’re financially able to do so.
Things like gold for long term capital preservation aren’t bad if you have the ability to buy some.

I’d stay away from investments at this point for a variety of reasons, not the least of which is that high frequency trading makes the market exceptionally vulnerable to system shocks. Consult a financial planner who has their fingers on the pulse of the world economy to get an idea of how you should diversify.

Are you running a business? Get ready for a slowdown. Beef up your database, beef up your lead generation, go full tilt on customer retention and be as flexible as you can with payments because your customers will be suffering as well. Treating them as well as you can (while not endangering your own finances) during rough times will earn loyalty that’s unshakeable.

If you’re thinking of making a career change, don’t you dare leap before you have something lined up. A miserable job that pays the rent is preferable to no job at all, and with the world economy on the edge, a system shock will make everyone go into turtle mode; hiring for anything except essentials is likely to dry up.

Always, always, always be building up your network. Grow it as strong as you can, because it’s the only thing that will save you if things go really badly. Jeff Pulver is fond of saying that we live or die on our databases, and that may literally be true in a very bad case scenario. You owe it to yourself and anyone you have responsibility for to be building like crazy right now.

I’ll take this moment to practice what I preach. Get connected:

What if things don’t go as badly as the predictions seem? What if things turn around? All this preparatory work will leave you with…

a solid network you can rely on
diversified financial investments
employment
cash to operate with

So even if these dire predictions are 100% wrong, you’ll still benefit from most of them. The only place you might lose out on is opportunity cost for not investing in the stock market.

I am not optimistic at all right now about the second half of 2011 and first half of 2012. There are far too many indicators that suggest rough seas ahead. Batten down the hatches.

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Mergers and Acquisitions 101

Christopher S Penn — Wed, 30 Mar 2011 13:03:15 +0000

In the wake of big merger news like AT&T and T-Mobile and in the social media world, the acquisition of Radian6 and Salesforce.com, I thought I’d do a short series on the bare basics of mergers and acquisitions (M&A) and what they mean to you. Bear in mind much of this is very basic – there are tons of nuances and variations on every aspect of this post, but this should cover the very basic mechanics.

Why do companies go through M&A?

Companies do M&A for a few basic reasons:

1. Acquire new products. Sometimes buy is cheaper than build, so you as the acquiring company just buy the company outright, rather than mess around with licensing deals. Salesforce and Radian6 would be an example here.

2. Acquire new assets. Some companies will be acquired for non-salesable assets (as opposed to products to be sold). When Southwest bought Airtran, it was speculated that this was because Southwest wanted an Atlanta hub. Sometimes companies are acquired simply for their customer base or market share, as with AT&T and T-Mobile.

3. Acquire new talent. Google is notorious for doing this, such as with Jaiku. They wanted the engineers and grabbed the entire company to get them.

4. Reduce operating costs or increase scale. Sometimes two companies can achieve greater efficiency or greater scale by merging. In the corporate world, this is a synergy merge. For example, Proctor & Gamble acquired Gillette not only for the product line, but also for a greater scale of manufacturing capacity and cost savings.

There is an underlying reason for all of these, however: companies go through mergers and acquisitions for an endgame goal of improved financial performance for shareholders. Remember this fact.

What happens during M&A?

Typically, prior to a merger happening, both companies do their due diligence in examining each others’ operations and financial performance. The value of the target company is negotiated on, and if everything seems like it would work well enough, contracts are signed and the merging process gets underway.

The acquiring company buys out enough ownership in the target company to effectively gain control over it. In publicly traded companies, this is done largely by buying shares of voting stock until the acquiring company owns a majority stake. In privately held companies, this is done by buying out owners of equity in the company from just a single sole proprietor to a team of shareholders.

Once ownership is acquired, shareholders are paid for their stake in the company and then the process of actually merging two companies together begins.

What happens to employees?

If you’re a shareholder of the target company, you get paid a cash sum or get converted shares. For example, if you were an employee of GTE that held stock in GTE back in the day, your GTE stock got converted to Verizon stock when the acquisition completed.

If you’re an employee of either company, you are effectively on notice. Here’s the thing about mergers and acquisitions: in order to achieve greater financial performance (which is the sole reason for M&A as stated above), you have to immediately reduce redundancies and inefficiencies. For every overlapping role in either company, one position will continue on and one or more people will be laid off. Let’s look at the human side of the four examples above.

1. Acquire new products. Everyone not tightly associated with the new products is probably getting laid off in the target company eventually. In the example, Radian6′s product team and probably a few of its service team will be kept in order to sustain development and service agreements, but other folks may not be.

2. Acquire new assets. If the asset requires staffing, such as the Southwest/Airtran example (new routes in and around Atlanta mean staff to operate them), they’ll be kept. If the asset requires no staffing, such as a database, then the target company’s entire team will probably be let go.

3. Acquire new talent. If you are the target pool of talent being acquired, life is good. If you’re not, you’re being let go. In the example, Google wanted Jaiku’s team and bought them out, but likely shed everyone who was not the engineering team.

4. Reduce operating costs or increase scale. This is the messiest of mergers as people in both companies are under the gun to demonstrate why they should be kept. It’s effectively a corporate deathmatch: two employees enter, one employee leaves, and employees in the acquiring company as well as the target company are at risk.

Remember this above all else: mergers and acquisitions happen for improved financial performance. Anything that doesn’t directly contribute to that in either company with regards to mergers and acquisitions is up for grabs. Also, bear in mind that there tend to be as many exceptions as rules when it comes to mergers. For every example and case I’ve cited here, you can easily name 10 cases where the consequences were different, even down to the endgame goal. Time Warner’s acquisition of AOL got them anything but improved financial performance, for example. Don’t take this very basic, very brief look at M&A as a canonical guide to what will happen if your company is going through a merger.

In tomorrow’s post, I’ll share with you some things you can do to either make yourself ready to be employed elsewhere or defend your position in a merger/acquisition.

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Marketing White Belt: Marketing ROI

Christopher S Penn — Tue, 22 Mar 2011 11:32:53 +0000

This post is part of the Marketing White Belt series.
The 4 Ps of Marketing
The SWOT Analysis
Marketing Funnels
Understanding Fast, Cheap, Good
Basic methods of making money
Basic marketing campaign plan
Always be testing
Marketing ROI
Foundations of Creative Marketing
The Marketing Spirit

Pick a term that is bandied about the most but understood the least and chances are it will be ROI, return on investment. Before we go any farther, let’s say a few things about ROI.

ROI is a financial term with an actual financial formula. There is no substitute for it and there are no factual, intelligent ways to weasel around it. Expressions like “return on influence”, “return on engagement”, and “return on conversation” are largely invented terms by people who don’t know how to calculate ROI.

That said, ROI is not the ultimate measure of marketing performance. ROI is an objective metric (an endgame metric that tells you if you’re there yet) only if cost containment is a priority for your marketing. If you are in a growth mode with an objective of capturing significant market share, ROI can actually be a hindrance to your marketing efforts because over-focus on it will prevent you from taking short-term losses in exchange for long-term potential gains.

So what is ROI? Simply put, it is the following formula:

Income Earned from Marketing Efforts – Marketing Expenses / Marketing Expenses = ROI

That is ROI. It’s a deceptively simple formula. The reason why it’s so deceptively simple is that there are a lot of components in each of the two areas.

Determining income earned from marketing efforts requires the use of a good CRM that allows you to track what marketing methods actually result in sales, and what the revenue of those sales is. For example, let’s say you sell chewing gum. To the best of your ability, you need to be able to track exactly how much gum you’ve sold to consumers at what price, by marketing channel. The last part is the catch. It’s easy to figure out how much gum you’ve sold, but much harder to figure out what marketing channel drove those sales. Online is relatively simple – using tools like Google Analytics to track checkouts at a virtual store makes that fairly straightforward. Offline is trickier and requires things like surveying and statistical sampling in order to accurately assess why someone bought a pack of gum.

Income can be even trickier to determine if it’s decoupled from marketing, as is often the case with wholesalers and resellers. If you manufacture alkaline batteries like Duracell or Energizer, there’s a good chance you use a distributor or reseller like a Walmart or Target to resell your goods. As a result, your marketing efforts to build your brand are decoupled from the actual transactions because someone else is handling the sales – and as a result, all of your brand-building effort may be for naught if a reseller fails to display your products effectively. One of the few methods that gets around this problem to some degree is coupon redemption. If a manufacturer issues a coupon, they can get an actual idea of a channel’s income generation potential by tracking how many coupons were issued vs. how many were redeemed from that channel.

The expense side of marketing is also fraught with danger, especially in fields like social media. Almost no one tracks the single largest expense in social media: time. Time is not free. Time has never been free. How much you spend in any marketing channel isn’t just a question of money leaving your bank account or corporate credit card, but time spent as money.

Here’s an example of determining time spent as money. Let’s say you’re in marketing and you earn $50,000 per year. The effective number of working hours you have per year is 52 weeks x 40 hours per week, or 2,080 hours. Your effective hourly pay, then, is $24.04 per hour. For every hour you spend on Twitter, Facebook, Quora, etc., you are effectively investing $24.04 of time as money in that marketing channel. Suddenly, channels like social media get very expensive.

So let’s put the two sides, income and expense, together in an example so that you can see what marketing ROI looks like.

Let’s say you decided to advertise using Google’s Adwords pay per click advertising. Let’s say you spent $500 in cash and 5 hours of your time (at a $50,000/year salary) to get Adwords up and running, and in turn, you earned $1,000 in sales of, let’s say citrus-scented headphones.

Do the preparation math:

Income: $1,000
Expense (cash): $500
Expense (non-cash): $24.04 x 5 = $120.20
Total Expense: $620.20

The ROI formula is Income – Expense / Expense, so $1,000 – $620.20 / $620.20 = 61.24%.

This is an excellent ROI. It states that for every dollar spent, you earned the dollar back plus 61.24 cents. Any business would be very pleased with that ROI and would likely ask you to invest a little more time and a lot more money if that result remains consistent.

Let’s try another example for the same person at the same company. Let’s say you’ve decided that Facebook is the hottest thing since sliced bread and you’re going to avoid outlaying cash on your Facebook efforts. You set up a Fan Page for your citrus-scented headphones, take 80 hours to set it up, administer it, manage the community, do outreach, etc. but you spend no money on it and you manage to sell $1,000 worth of those strange headphones. You’re feeling good about yourself – this social media stuff works, right?

Do the preparation math:

Income: $1,000
Expense (cash): $0
Expense (non-cash): $24.04 x 80 = $1,923.20
Total Expense: $1,923.20

The ROI formula shows $1,000 – $1,923.20 / $1,923.20 = -48% ROI. Uh oh. When you account for time spent as money, Facebook (in this example) is a money-loser. For every dollar of time you invest in it, you’re losing 48 cents.

This is where it’s decision time for you as a marketer.

Remember, if cost containment isn’t a primary goal, ROI isn’t the correct metric to be focusing on. If you’ve made the conscious and strategic decision to take a financial loss (in cash and time spent as money) in order to grow a long term opportunity, then this ROI of Facebook for citrus-scented headphones may be acceptable. However, if cost containment is a primary goal for your marketing department, you have to make the decision whether to adjust your Facebook strategy or cut it out and stop your losses.

Ultimately, ROI is just one way to measure marketing’s performance, but it’s one of the least well-understood ways of doing so. By walking through this calculation, you’ll realize just how difficult it is to calculate with great precision and how meticulous you must be in your tracking methods in order to capture even moderately good quality data. If you can do that effectively, ROI is yours to analyze, but if you can’t because of organizational structure or operational issues, then you’ll need to forego the use of ROI as a marketing metric.

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Marketing White Belt: Basic Methods of Making Money

Christopher S Penn — Thu, 17 Mar 2011 12:53:25 +0000

At the end of the day, you have to make money in order to pay the bills and stay in business. There’s no avoiding that reality: somewhere, resources must be provided in order for you to do what you do, whether you’re a Little League baseball team or a Fortune 50 mega-brand.

In order to make money, you have to provide something in exchange. As marketers, it’s incumbent on us to understand how our businesses work so that we can understand where and how we provide value, then help share that value proposition with our customers.

While there are nearly limitless ways to provide value, most business strategies fall into four big categories:

Product. You make something and sell it. This could be your bestselling social media book, clay pottery, aged cheese, whatever. It can be polished goods or raw commodities, but whatever it is, it’s a thing you sell. In exchange for the goods, you receive money. For most of human history, people made stuff and sold it, and their business fit into this category.
Reseller. Someone else makes something and you buy it from them, then resell it. You’re not actually making anything, but chances are you package up the product or provide additional value-added services for it. For example, Walmart buys stuff from manufacturers and resells it to you. Their value-add is ubiquitous locations from which to buy stuff. Amazon does the same online.
Service Provider. You do something for someone. Maybe you’re a virtual assistant, a life coach, an email service provider, a stripper, a hotel, a stock broker, or an enterprise CRM in the cloud. You do something for someone, but don’t make any tangible good that you can hand over. In exchange for the service you provide, you receive a fee.
Media. While this could be considered a service, what makes the media model different is that the person you’re providing a service to isn’t necessarily the person who is paying you, and you’re not reselling something else. The word media is derived from Latin and literally means in between. In the media model, you aggregate the attention of an audience and then sell access to that audience, standing between buyers and sellers. Broadcast media, affiliate marketers, bloggers, and social media outlets all fit in this category.

Why are these basic archetypes important? Understanding where you’re starting from will lend insight as to where your business can go next and how you as a marketer can help illuminate your value. Businesses have ways to transform the value they provide, including customization and service. Understanding where you’re starting from can guide you where you need to go.

Customization is the act of taking something and giving customers the ability to add or remove things from it based on their needs. How would this look with these archetypes?

Product: You can order an iPad with a variety of different features, then add or remove apps to suit your needs.
Reseller: Customization is really hard for resellers because you’re not making the products. About the best you can do is package and bundle products together, offering different combinations of other people’s stuff.
Service Provider: Add or remove services you need or don’t need. Mobile phone companies have menus of different services that match the size and scope of fast food restaurants these days.
Media: As an audience member, you can customize the content and delivery you want, and as an advertiser, you can customize which audience you want to interact with.

Service is the act of taking something and providing helpful interaction with your business. Customer service is most often the basic service use case, but other services like education and training equally apply. How would service apply to the different archetypes?

Product: Obviously, customer service applies to fix broken products, but you can also provide education and training. Apple does this especially well with classes, the Genius Bar, and 1-to-1 training.
Reseller: Here’s where resellers can make their money – teaching people how to use and get the most out of other people’s products. Stores like Lowes do this especially well, with clinics on how to garden, paint, etc.
Service Provider: Service can exist on top of service. Blue Sky Factory, as an example, provides software as a service but adds a ton of customer service, strategy, and training on top of its software service.
Media: Most often, media doesn’t do much at all in the way of service, which is a critical mistake. Help your audience understand better what is available and how to make the most of the content you create, and help your advertisers be more strategic and effective in leveraging the audience you aggregate. As part of standing in between two parties, you can help both communicate more effectively with each other.

Finally, it’s important to note that few companies are pure plays in any one archetype. You can make your own products and resell others, or you can make a product and sell a service alongside it. You can be a media outlet and have product to sell directly to your audience. You can be a service provider and resell other services with yours.

The important part isn’t trying to pigeonhole your business into one category alone, but to try and understand which archetypes and models drive the most value for your business. Once you understand your core value propositions, you can be a much more effective marketer for your business.

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