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An Incomplete Scenario?

I got a great email from Chretien of SR6 who had some feedback and questions regarding my article, Tips on Buying Flat-Rate Text Ads. He helped me realize that to someone who doesn’t participate in email marketing, the scenario appears incomplete without discussing sales conversion data. I’ve paraphrased his questions, and hopefully they will help clarify some questions some of you may have had also…or not…

Does the conversion rate matter if the campaign is profitable at both 20% or 5%? It’s either profitable or not, right?

This is a tricky question, in that he’s addressing an issue I did not cover — sales conversions. I was strictly focusing on email sign-up conversion rates, not sales conversion rates, only asserting that the overall subscriber value was $6.00. I will touch on how this is calculated in a minute.

When driving users to the email sign-up page, I calculate the sign-up conversion rate like this:

• If 500 users land on the sign-up page, and 100 users sign up, then (100/500) the sign-up conversion rate is 20%.
• Furthermore, if 100 users receive the email, and 5 users complete a purchase, then (5/100) the sales conversion rate is 5%.

To address his inquiry regarding a campaign’s profitability, is it profitable if the gross margin is 1%? Technically, yes, but it might not be worth the time and investment with such a small margin. Most likely after the first week, the gross margin would be in the red.

But if in one week you are able to maintain a gross margin of 70%, then in one month there is less risk of being in the negative for that duration of time. Therefore, there is a difference in being profitable, and being profitable with the added goal of a target margin. And this is where the minimum conversion rate is so important — it’s the threshold point. When working for a company, as I was, it’s best to err on the side of being safe, and thus the goal was set at 50% gross margin or higher.

Profitability can change from month to month. Your example doesn’t make sense because a steady email conversion rate does not mean steady sales revenue.

Chretian is correct in that sales revenue can change month to month, but in the scenario I was assuming a constant subscriber value for the sake of providing an example of a buy. But we can play around with this number to illustrate his point. Let’s say it’s October and email subscriptions are steady but sales are on the decline. The actual subscription value in September was $6.00 but now it’s dropping. How do we re-calculate the subscription value after a month of lessened sales?

If in October, a total revenue of $10,000 was generated and 2,000 new sign-ups were created, then:

• Actual Subscriber Value = Monthly Revenue / Monthly Sign-Ups
• $10,000 / 2,000 = $5.00

Therefore, reaching the same gross margin of 50% of $5.00 would mean tightening up projections, and aiming for a maximum sign-up CPA spend of $2.50. The email sign-ups may have reflected a steady conversion rate, but diminishing sales will decrease the overall actual per-subscriber value. As an advertiser, determining subscriber value for this type of sales process can be done on a monthly or quarterly basis, depending on your market. We opted to calculate subscriber value on a quarterly basis.

I hadn’t thought about detailing the sales conversion process, but Chretien helped me realize that I hadn’t explained the $6.00 subscriber value, which doesn’t come into play when driving traffic directly to an affiliate merchant site, or an e-commerce, or various other types of sites where you might only be following one conversion rate for sales.

But keep in mind that determining your minimum and maximum levels for any campaign creates your reference points and can help motivate you to increase your margin each month, either by increased sales or decreased ad spend. I hope this was helpful. If not, shoot me an email and maybe I’ll write a follow-up follow-up!

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