In this article, we will apply principles learned from our sales experience before and after launching our agency more than 15 years ago. We will include examples to explain the points raised.

Just because a discount can be done does not automatically make it a good idea. If an established business lowers their revenue stream from their everyday existing products or services without having a specific goal in mind, they may work harder, yet suffer a loss in revenue.

Point #1: Why / When to Discount

A good starting point is to take a high-level assessment of your business situation. Are your working with a new business launching a new product or service? Or a mature business with a specific, tactical goal you need to accomplish? Or something in between?

Example Business Situations

• Starting a new business to sell a product, a service or both
• Existing business needing to gain market share or launching a new product or new service territory
• Need to reduce excess or short-dated products, or utilize excess capacity
• Service business needing to get more leads to keep their employees busy during an annual slow season
• Mature business need to achieve a specific goal such as to increase Return on Ad Spend (ROAS) without lowering current sales volume.
• Promote a seasonal product or holiday

2 Key Initial Questions: What incremental activity or outcome is needed? What possible pitfalls that need to be avoided?

Point #2: What / How Much To Discount

• Dollars off are not always the only or best way to promote
• One key reason: discounting the selling price has a larger effect on gross profit, because selling price includes the cost of goods.
• Sometimes including a free related service or product with a required purchase has higher perceived value to a customer than a $ discount
• Calculate how existing sales volume and revenue will be impacted. More on this below.
• List what non-desired outcomes might be possible, and how to avoid or mitigate those.

How Much Does a 10% Discount Cost the Seller in profits? The answer depends on several factors: The overall cost for discounting a new product with no existing sales is less than the impact on existing product movement and its revenue. Refer to “The Calculation” section below that includes cost of goods.

Business Scenario: A mature snack food manufacture has a new product to launch and promote.

• Mature snack manufacturer with 10 current products (SKUs), and steady monthly wholesale sales of $100K (at full price).
• Manufacturer direct cost of goods and production is 50% of their selling price.
• Manufacturer is about to launch their 11^th product (SKU).
• All their snack products are perishable, and have a 90-day shelf life before expiring.
• The manufacturer’s customer (distributors) put the product in retail stores.
• The distributors also pick up expired products from the stores, and “charge back” the manufacturer for products that are unsold and expired.
• Distributors will often aggressively “forward buy” at the end of a discount period, then buy less than normal in subsequent months. This pads their margins, but the manufacturer gets no benefit and some unwanted issues.
• Their distributor is requesting a “customary line drive of 10%, 30 days” for all 11 products, saying it will increase excitement and sell more product overall.

Manufacturer’s tactical goals

• Get shelf space for the new product in the stores
• Get existing and new retail customers to try the new product.
• Jump start sales by generating retail excitement and incremental displays.

Pitfalls to be Avoided

• Losing revenue on existing product orders, that the manufacturer would otherwise get at full price.
• Losing revenue on existing product orders after the promo, due to forward (discounted) buying from distributors near the end of the promo period.
• Increase in manufacturer charge backs from retail stores starting 90 days after the promo ends due to forward buying by distributors and resulting increase in stale products.
• Possible retail price and profit margin erosion on the existing line, due to discounting too frequently.

Simple Example of The Calculation:

The calculation needs to take the cost of goods into account.

How much does the proposed 10%, 30-day discount of the manufacturer’s full line of products affect their profits?

• $100,000 x .50 ( to cover cost of goods) = $50,000 gross profit per month at full price.
• 10% discount on $100,000 in product sales = $10,000 less revenue. So, before any incremental revenue, and with the 10% off the selling price, cost of goods stays the same, but gross profit is now $40,000.
• Stated another way, 10% of all existing sales in one month = 20% reduction in monthly Gross Profit, due to cost of goods.

To break even (get at least $50,000 in gross profit) at a 10% lower selling price requires the discounted promo to generate $125,000 ($25,000 or 25% more in increments sales volume) over the same period.

How much does discounting the single new product cost?

There are more variables here, but it the impact of discounting a new product is less. The difference is there is no existing revenue stream that gets discounted. Cost of goods still matter, but with a new product, it is important to jump start customer purchases. Especially on a product with a relatively short shelf life.

The Plan:

Existing products: No discount – it does not make sense to discount existing products just because a new product is being launched.

New product: Deeper discount than requested on the new product (that has no current volume). Make it 33% off or a BOGO rather than a mundane 10% that generates little excitement. This will hopefully show support for the new product to the distributor, and the discount is deep enough to get retailers to create a stack or endcap display. These help generate incremental volume needed.

TopSide Media’s Summary of Top 5 Steps

1. Assess your business situation, and define the specific goal you need to accomplish
2. Define the outcome(s) you want to avoid (pitfalls)
3. Plan the sale / promotion to accomplish 1 and 2
4. Execute the promotion
5. Recap and document the results for future use

Our next blog post, part 3 of 3 in this series, will be on customer intent in search keywords, and custom intent audiences in display ads. If you have questions or experiences to share on discounting, please let us know.

When we began our agency in 2005, some of the best advice we received was this: the first goal of business is to stay in business. And, to stay in business: have a plan, and avoid blunders. Avoiding math blunders in client work is a basic and useful business concept.

Today, we will focus on three commonly misunderstood metrics: Markup, Margin, Return on Ad Spend (ROAS).

Below are practical definitions in business math. Understanding their differences is key to avoiding mistakes that would certainly be embarrassing, and could potentially be devasting business math blunders.

Markup and Margin are two different perspectives on the same process: the costs a business bears, and how that cost relates to the selling price received from their products or services.

Markup (cost perspective)

Definition: In commerce, Markup is the amount added to the cost of goods or services a business bears. Together, the cost of goods (or services), plus the markup equals the selling price.

Margin (selling price perspective)

Definition: In commerce, Margin is the portion of the selling price (usually expressed as a percentage) that was added to the cost. Stated another way: Margin is the percentage of the selling price that is profit.

A business math mantra: Markup on Cost // Margin on Sell.

To remember forever, chant the following mantra over and over to the cadence of “follow the yellow brick road” from the Wizard of Oz: Markup on Cost – Margin on Sell.

Simplified Scenario for Markup and Margin of a product:

Cost of a product to sell is simpler to determine than costs of providing a service to customers. So, in the simple example below, our Merchant buys a product for $10 and sells it for $20. How much is their markup, and how much is their margin?

Markup = 100%. (The merchant’s product cost of $10 has $10 of markup added, to create a selling price of $20. ($20 – $10) / $10) x 100 = 100%

Margin = 50%. (The merchants selling price is $20, with cost of $10. The retail margin is $10/20 x100 = 50%.

Return On Ad Spend (ROAS)

There are many levels at which ROAS can be calculated. The reason: there are direct and indirect costs of operating a business to sell a product or a service. These are sometimes called hard and soft costs, respectively. Therefore, profits can be stated in different ways, including Gross profit and Net Profit.

General Formula

$Value of a Transaction (actual selling price, or lifetime value of a customer) divided by the $cost to generate that transaction. This can be expressed as either a multiplier, or a %. Also, it can include only the direct cost, or deeper costs can be included. And it can be calculated at a granular level, or as an average of transactions in specific period of time.

Examples of ROAS: Product and Services

Ecommerce

Ecommerce is the purest form of PPC advertising, and ROAS can be tracked, down to the keyword level. For both products and services, PPC ROAS — correctly done — is an amazingly powerful tool. In PPC advertising, the metric named Conv. Value / Cost provides a basic, high-level view of Return on Ad Spend or ROAS.

A product being advertised online has a selling price of $90. If it takes $10 in ad traffic cost to generate the sale of one item, then $90/$10 = a top line ROAS of 9x or 900%. Each dollar spent in ad traffic generates $9 in top line sales.

For deeper reporting and goal setting, the cost of goods and other business costs can be included in the calculation, and also the agency cost. There are other variables to keep in mind, such as the fact that receipts (a.k.a. “tickets”) often include multiple-item purchases, product shipping costs, etc.

Generation of Leads

ROAS can also be calculated on lead generation, but it is more complex. For this, we compare the cost of generating a lead, transaction or customer, to the average $value of a transaction. Or better yet, to the average lifetime value of a customer.

Calculating the initial cost per lead is first step. For many businesses, including incoming phone leads for ad traffic along with online leads helps complete the picture of cost per initial (raw) lead. The next step is the average of how many leads it takes to generate a lead that meets certain sales criteria (qualified lead). And finally, calculating the cost to generate a sale or customer. For services or products with longer sales cycles, this is a reason to have a customer relationship management (CRM) system

TopSide Media’s Top 5 Tips

1. Memorize the Markup / Margin / Yellow Brick Road Mantra.
2. To correctly frame discussions and reporting related to Markup, Margin, and ROAS, gain a deeper understanding of direct and indirect cost of operating businesses you are involved with, along with their categories.
3. Ecommerce ROAS is the purest calculation, and can be done at a top line, or deeper levels.
4. To calculate ROAS in PPC advertising, conversion tracking must accurately capture the $value of the transaction. This often requires programming skills, can be complex.
5. ROAS can also be calculated on lead generation for products and services, and that requires longer and more involved tracking. Depending on the length of the sales cycle and customer lifetime value, a CRM can be set up.

The next two articles in this series will be on discounting, and customer intent.

We hope you find these useful. If you have questions or comments on these topics, please let us know.

Rarely do advertisers have unlimited ad budgets, even if they get a very high return on their ad spend, or great cash flow. Rather, most businesses have a fixed, planned maximum budget. And even if their business model and budgets are somewhat scalable, their business may run into limits on personnel, supplies, inventory, etc.

Yet, fairly often we get questions from clients about advertising a new topic, keyword or in a new geographic area. When we receive such a request, our agency repeats a step that we do while designing and building a new PPC account and related settings such as campaigns, keywords, demographic filters, etc. That step:

We calculate whether there is more search traffic than ad budget, or the reverse of that. Usually, the answer is “more traffic than budget”. In a running search ad campaign, the amount of traffic not reached due to budget is called Search Lost Impression Share Budget (Search Lost I.S. Budget).

Big picture: when there is more traffic than budget

When asked, most advertisers will answer that they want to spend their ad budget on the most productive topics — the ones that most efficiently convert traffic and ad budget to leads and purchases. A couple of key concepts: (1) set up campaigns so that topics of similar value compete for budget, and (2) like the old adage for stock accounts – let the winners run, and get rid of the low performers.

Big picture: when there is more budget than traffic

Unlike most types of advertising, in search ad campaigns it is possible to have more available daily  budget than traffic for lower search volume topics. Often the keywords or topics with the most precise customer intent (thus highest value) are limited in search volume. This is especially true for businesses that are local or regional in geographic coverage. For that reasons, we will often assign a dedicated campaign (thus search budget) to the most precise or highest value search topics.  When there more budget than search traffic (or optimized search traffic for some types of bidding tactics) then funds not needed simply don’t get used.

Now back to requests / ideas for new topics

In a scenario where the account budget is fixed and all being used, and traffic for new topic, or geographic territory is added, budget will be diverted from the previous keywords or geographic territory to “feed” the new one.  And, while it is true that well-designed testing of settings is a best practice, often we have data, or can forecast that the new topic may not work as well as the others that are already running. One of the more frequent reasons for this: the new topic or keyword being requested is either not present, or not well developed on the advertiser’s website. Getting on to action points, we’ll close this post with the following list:

TopSide’s Quick 5-point checklist when considering new search topics or keywords:

• Does the topic or keyword being considered get enough search volume in the geographic area covered by your business to make a positive impact?
• If the answer to #1 is Yes, is that topic present in text and well developed on your business website? If No, are you willing to add / have it added to the website?
• Is there a clear call-to-action and well-designed “conversion path” for the new topic on its page?
• Is the topic a new ongoing one, or a short-lived event? (The minimum traffic and run time needed to optimize for results is often months, not weeks or days.)
• Is there more traffic than current budget for your ad account? If Yes, are you willing to give up some of your current leads or online orders to test the new topic? If not, consider assigning an additional, dedicated budget for the new topic.

Comments or questions on this topic are welcome.

A quick definition of negative or excluded keywords is as follows: a filter that prevents ads from showing. They are used to exclude aspects in your business category that you don’t want to trigger an ad for your particular business. Negatives (or NKWs as we call them around the office) increase overall efficiency of online ads. Proper use of negative keywords increases the CTR clickthrough rate, and this an important indicator of efficiency and relevance. The search engine ad programs reward efficiency with a lower CPC cost per click. More relevant ads usually produce a higher conversion rate and lower cost per conversion also.

Although in many ways they are opposite, like “positive” keywords that are used to trigger PPC ads, negative keywords can be single words or phrases. In some PPC ad programs, such as Google AdWords, negative keywords have broad , phrase, and exact matching options. Once an account is built and launched, we use a report called a Search Query report to look for additional negative keywords and topics for additional refinement.

The example we referred to is a Business-to-Business advertiser. B-to-B companies, particularly those in technology, tend to need more advanced negative keywords and tactics. The reason: many enterprise technology products and services have consumer level counterparts. Some of these (a couple of examples would be anti-virus and data backup /storage) are even free. In addition to negative keywords, filtering text in the ads can help filter out individuals who are not good prospects for a specialized or more costly product or service.

In summary, to make the most of your search marketing budget, a significant number of refinements are necessary to the default settings in PPC ad programs. Some of these are done up front, and more need to be done as search and click data comes in.

1-Have an overall web marketing plan and a person “driving” who understands the components and sequence of how things work together. We wrote about this in our May 14 blog and won’t repeat it here.

2-For easier understanding, break the big pieces down into smaller parts or steps. We will take six topics as examples of how to reduce web marketing topics into smaller pieces. For simplicity and brevity, we’ll only divide each topic into only two parts, rather than all the possibilities for further divisions. In internet marketing, some topics have more than one name. One of the main topics, pay-per-click advertising, has more than ten ways to describe it.

What Do You Need From the the Internet, leads or sales?

• Leads: Online inquiries or phone calls for a transaction that will happen later. Examples are complex sales for business services or products, professional services delivered in an office, services for your home or business.
• Ecommerce: The sales transaction for a product or service that takes place online and is usually paid by a credit card, PayPal, etc.

Your Service Area or Scope

• National: You want business from all over the country, and searchers may not use city names (or other “geodescriptors”) while searching for your product or service.
• Local: Your customers are likely to be from nearby because they come to you or you go to them. Even so, some of your customers will not include the name of your city or geographical area in their search.

Types of Web Traffic Available

• Natural (Organic) Traffic: Traffic your website gets without paying the search engines incrementally for it. Examples: Being found by search engines, direct links, and Google Maps. You can pay, however, to have an expert take action to or for your website that causes you to be found through natural/organic processes.
• Paid Traffic: Online advertising such as that from Google AdWords and Yahoo Search Marketing or MSN. Some other names for this are PPC, Pay per Click, Paid Search, etc.

Search Results Page

• Natural/Organic Results: The part of the page in the left /center.
• Ads or Sponsored Links: Found above, to the right of (in a column), and in some engines, below natural/organic search results.

SEO: Search Engine Optimization

• On-Page: Action taken to or on your website to help it gets found through natural search. Examples: adding or changing the content such as meta-tags or page names, keyword rich text, or adding a site map.
• Off-Page: Action taken somewhere other than on your website to be more visible to or ranked higher by the search engines. Examples include: directory listings, articles written and submitted elsewhere that reference your website. Links from other websites to your website (called backlinks) also fall into the off-page category.

Pay Per Click/ PPC

• Search Mode: Your potential customer enters a search (query) into a box and clicks “Send”.
• Content/Contextual Mode: Your potential customer is reading something and sees an ad. He/she may be “looking” but they did not just enter a query and hit the “send” button like in search mode.

We hope you find our systematic examples useful to you. We will write more about each topic and its subdivisions in future posts. If you have feedback or suggestions for future topics, please share them or send us an email.

The Art and Science of Effective Websites

A website is a prime example of art and science. It takes many skills to produce an effective website, and it is not easy to find web design individuals or firms that can produce an effective site affordably. If you rely on one individual, chances are they will come from either a design background or technical background. Rarely does one individual have the skills to cover all bases well. Some web builders will partner with others who fill gaps in their skill set or work preferences.

Below we will list some aspects of a good overall website & marketing plan.

• Website look and feel that satisfies the site owner and appeals to/quickly engages the target audience
• Stand six feet away from an average computer screen. Can you tell what your website is about? You should be able to.
• Site structure and content that can be found by search engines (mostly html, limited flash, etc.)
• Provisions for your potential future business needs and uses: ecommerce, databases, etc.
• Built on a standard platform, so any webmaster can modify the site later
• Reliable hosting account that you have login access to for future needs
• Control of your domain name registrar login info
• Usability and conversion efficiency (number of pages, length of pages, ease of use, what is visible above the fold, length of forms, placement of phone numbers, etc.)
• Best practices followed for optimization for natural search, aka SEO. This consists of two elements: “on page” elements such as the way the site is built, meta tags, text content of main pages, attached blog, etc; and “off-page” elements such as news releases and other actions that link back to your website.
• Blog attached to inform/engage customers and provide original, fresh content for search engines
• Best practices followed for PPC advertising, conversion tracking, and phone number substitution
• Simple content management system (CMS) so it is easy for you to make changes to text or content yourself instead of having to contact your webmaster
• Regular backup plan for the website

We welcome your comments.

• Focus on return on investment. Understand that fully before drilling into the details of how PPC works. ROI is the best comparison tool for all online or direct response marketing efforts.
• Understand that PPC is advertising, and how ads relate to natural results, which is affected by a different process called SEO (stands for search engine optimization). Taken together, SEO and PPC are two components under the broader category known as Search Engine Marketing (SEM).
• PPC goes by many other names: pay-per-click, sponsored links, paid search, search ads, search engine ads, Google AdWords, Yahoo Search Marketing, MSN AdCenter, and more.
• PPC ads can be used to reach the reader in two different modes: search mode compared with content or contextual ads. Search ads respond to demand at the moment the user has entered a query. Content ads send a message when a potential customer is reading content related to your topic. Examples of content are Gmail, blogs, online articles of many types.
• Text ads compared with graphics ads. Text ads are comprised of words such as those that appear on searches on the Google search engine. Graphics ads contain images and appear around many types of content. They are found in a wide variety of formats, including static, rich media, and more.
• The cost to use (bid on) keywords is based on the demand and competition for that keyword, not on the underlying value of the product or service being advertised. Therefore, tracking ROI is critical.
• If you are also considering SEO, have search engine ads done first. The initial cost is low (compare to the return in new business they can bring you when done by a professional) and the results are both fast and measurable. Make sure all tracking options are used to document what converts to online inquiries and phone leads within your geographic location and from your website.
• Within search engine advertising there are professionals who can set up customized, more “hands on” solutions on Google, Yahoo, MSN etc. There are also more automated programs that can be utilized, some of which include a web page. Other vendors bundle offline products, a web page or even a full website with internet marketing. These programs vary significantly in their traffic sources and tracking ability, so be sure to compare and get references from others in your category. Before taking action, talk with a search marketing professional who offers all products and make an overall strategy before implementing tactics. This will greatly increase your likelihood of success, by avoiding products and costs you do not need.
• The right choice of tactics and vendors for your situation will depend on: a-if you have a website or not already; b-if your website has serious problems and the cost of fixing them; c- the time or resources you are willing to dedicate to writing blogs, writing press releases, etc.; d- the initial budget you set for internet marketing.
• Use the data gathered from search engine advertising (again…what is profitable in your geographic location and from your website) to decide if SEO will also pay a return. With SEO, a website can be optimized for a few dozen search terms, so your are wise to pick your targets carefully. You must have an overall plan, because the sequence in which you do these is key.

Teams that take time to make a plan before taking action consistently perform better than those who do not.

The same is true for marketing on the web. Having a well thought out plan and executing it effectively is more likely to lead your company to success than trial and error. As advertising and marketing options become more numerous and fractured, a website owner must have a plan to avoid expensive mistakes. The plan should include clear objective(s), strategies, tactics, timelines and dedicated budget. The creation of the plan should be relatively low in cost and high in returns. Assuming that one person will not be likely able to execute all aspects of the plan, it should include the best person, skill sets, or vendor to implement each action point.

Below are five examples of money-wasting blunders that often result from lack of planning:

• Having a website built (or rebuilt) without including features needed for internet marketing or advertising The structure of the site can cause it to not be found by the search engines or be unsuitable for receiving prospective customers from search engine ads. A website can look good and/or provide lots of content, but still not get traffic or convert traffic into customers.
• Paying for SEO before using search engine ads (aka PPC, pay-per-click) to learn about your website effectiveness at conversions and what works in your geographic area. You should have PPC done first, and then consider SEO.
• Signing contracts for marketing or advertising that is not measurable.
• Allocating the wrong % of your marketing budget to online efforts.
• Buying online advertising bundled with other advertising that may not be needed.

We look forward to reading about your experiences and comments.