Traditional marketing strategy relies heavily on small-scale metrics. Often marketers justify their campaigns by directly measuring revenue generated on spend. The objective? To reduce the amount spent on gaining each lead or sale.
However, focusing on ROI can cause marketers to lose sight of actual long-term effects on the company’s bottom line. Are you accounting for the average lifetime value of a customer? What if you decrease the cost of acquiring new customers but still take an overall loss because the service or product is being sold at a low gross profit margin? Short-term metrics have their place, but profitability is ultimately the single most important metric when assessing a business’ health.
In an understandable but short-sighted attempt to control their bottom line, businesses typically want every dollar spent by the marketing team to produce immediate demonstrable results. They push to reduce lead acquisition costs as much as possible and commit all their resources to fixed budgets. To someone who’s always operated this way, spending less seems like basic business sense.
This kind of thinking also tends to be detail-oriented — to a fault. A by-the-numbers attitude leads companies to continue marketing an under-performing product or service in a desperate bid for sales rather than pulling back and evaluating the overall value of that offering. Yet it’s considered a victory when sales totals go up, even if those sales are of dead-weight products which yield poor gross profit margins.
Instead of micromanaging every marketing campaign and trying to drum up underperforming products, companies with vision focus above all on gross profit — revenue minus the cost of goods sold. No matter how good any of your other numbers may be, if they don’t translate to profitability, your company isn’t likely to survive (or thrive) long-term. When all is said and done, gross profit is what you really have to show for all your marketing efforts. Therefore, shouldn’t it be the primary focus of your marketing mix?
Optimizing for gross profit also creates a positive feedback loop. More profit translates into increased capacity, allowing companies focused on maximizing gross profit to:
If you’re looking for a real game changer, however, consider this — maximizing gross profits doesn’t always require reducing lead acquisition costs. As you can see below, the acquisition cost (cost per sale) rises on its way to maximum profitability. This means that the gross profit margin incrementally decreases relative to more spend. The tipping point here is critical, as that’s where the business still makes a <.01 gross profit on each product or service sold.
Many business leaders balk at the idea of flexible budgets, but a fixed budget simply can’t account for the unpredictable effects of seasonality, competition and human behavior because supply and demand aren’t fixed or static forces. Flexible budgets are the only way to maximize profit in a constantly evolving marketplace. However, moving to a flexible budget doesn’t mean indiscriminately throwing money at a problem. It just means broadening your perspective.
To shift your business’ focus to maximizing gross profit on marketing spend, begin by allocating the majority of your marketing budget to promoting the products and services that yield the highest gross profit margins. Once that profit is maximized, you can begin marketing the products with the next-highest yield, and so on. Only disregard this rule for significant loss-leader product offerings that are very likely to drive the development or sales of other profitable products and services.
Profit-oriented marketing has been the catalyst for many well-known business success stories. When Steve Jobs returned to Apple as interim CEO in 1997, he counterintuitively slashed the company’s product offerings by 70 percent, betting everything on a few winning and — most importantly — profitable products. By looking at the big picture rather than playing a numbers game with an overwhelmingly overcrowded product selection, Jobs was able to save the company from bankruptcy. His forward-thinking vision propelled Apple forward and eventually helped make it the most profitable business in the world.
Ford Motors seems to be following suit, announcing in April 2018 that they are discontinuing production on all sedans to focus exclusively on their more popular and profitable trucks and SUVs. It’s too early to state definitively how this move might impact their long-term prospects, but the automaker’s predictions are wildly optimistic. By focusing on gross profit, Ford expects to become America’s leader in vehicle sales by 2021.
Making the shift to profit-centered marketing means looking at the overall wellness of your company instead of merely trying to reduce spending at all costs. It might take some time to adjust to this strategy, but you’ll soon reap the rewards.