Chapter 16:

The costs involved

So we mentioned the fixed costs and were halving and doubling them. We also made a pun on the 200 thousand messages that cost zero point something. There are a lot of costs involved we seem to forget when we are doing marketing, which is just plain dumb. Bigger businesses have a fancy acronym for them called OPEX (operational expenses). When we are doing calculations for our campaigns, we need to take all costs into account, but what costs are there?

There are three kinds of costs, fixed, variable and media costs. Often, and its very bad practice, companies just calculate the media costs and complain about the fixed and variable ones. But we really need to take all things into account.

There are lots of ways to work this out but here is our suggestion.

Fixed costs are something that will always be the same to the business.

They are costs like hardware used, software, rent, lighting, heating and everything else that goes into running the business. One way to calculate this is to work out your fixed cost per hour. This can then be added to your variable costs. So get the total business cost for last year and divide it by the working hours per employee (2080) per year. So if your fixed costs are $1M a year for 20 employees you would have a fixed hourly expense of $1M/(2080x20) = approximately $24.03.

Variable costs vary based on what you buy. They are costs like designs, workshops, copywriting expenses, translations, development and stock photography. You should also add your employee cost to the variable costs too. Again you can total all the variable costs and then divide by the hours used on the case. So whatever the agencies charge plus employee logged hourly cost (or man days) divided by the hours the employees use.

The media costs depend on quantity. Whether it's search, banners, social media, SMS or e-mail sending costs, software licensing fees or operator fees, these have to be taken into account.

If you do a media buy of 4000 messages for $50CPM ($0.05 each) that might sound like a pretty good deal. However when you add the rest of the costs to the program it doesn't sound so good.

Remember to add your own work as a cost.
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You should for instance work out a base cost per send (campaign OPEX) and add your media costs to it to work out your true CPM (and then later your true CPC). So lets say you have employees working for 75 hours and their salary costs you $35 per hour. You also have your agency fees of $10,000 and a fixed cost of $24.03 (based on the above fixed cost of $1M per year for 20 employees). How I would handle this is to add up your fixed and variable costs ($59.03x75=$4427.25) and add that number to your overall media & agency cost ($12000). It means your overall cost to send 1 message is $16 427.25/4000=$4.10. Now it's much more difficult to justify - your actual CPM is $4106 which you will have a tough time making profitable.

The way the big guys do this is to work out when the OPEX becomes viable by ramping up the amount of messages or impressions they buy. If instead of 4000 the buy was 4 million then the cost would be much easier to make profitable. Assuming the CPM is the same the new media cost would be 4000x50= $200,000. Then add the other costs 200,000+4427.25+12000= 216,427.25, then divide by the amount you can potentially reach to get a cost per send of 216,427.25/4,000,000 = $0.054. This therefore is much easier to justify as it's more likely to be a profitable use of time and money than sending 4000 messages. Once you start thinking like this you can quickly work out what kind of reach you should pay for and when you shouldn't.

You also then could work out the expenses for all your reach sources (including earned media) by working out the baseline cost per visit in the same manner. It might sound obvious that the more you send out the more chance it will be profitable and not everyone has $216K to throw around on a media campaign. We get that, but you need to understand this part in order to optimise the entire business so it works for your numbers. Optimising conversion obviously helps too.

You might think it's cheap, but you might be seriously wrong.
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I have seen cases where only the media cost is taken into account to justify the return on investment. The results were good on paper but they were doing everything in house and were not calculating the costs of the four people working nearly full-time on the case. Nor were they looking at the cost to the business of running the operation. When we added those costs into the valuation, the tone was very different.

If you liked this chapter, please recommend it to others.

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About the authors

We have a single goal together, to make our customers a billion euros in profit. This won't happen in one year, it might take five years, but we will not stop until we have generated a billion of provable profit for our customers.

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