Calculate the Cost of Chasing a Lead. Reduce it by Giving
If you're like most people, you don’t give a second thought to chasing a lead when the opportunity arises. Chasing a lead is one of the most cost-effective marketing tools that companies and businesses use. However, many people in our industry are unaware of how much time and expense it involves, as well as some of their tactics for increasing exposure.
I'm here to provide a simple guideline that will help you reduce the cost of chasing leads by giving away something valuable in return. This calculation will show you exactly what you need to give away and how much you need to discount your product or service in order for it to be more attractive as an offer. Let’s say your company is launching new sunglasses with better technology than ever before; after factoring in other expenses such as overhead costs, gas money, etc. the cost per pair to get them into retail stores is $10.00, which means your profit margin is $10.00 – $10.00 = $0.00.
Your distributor has been extremely supportive of your product and you feel that they deserve a reward for their efforts, so you decide to give them a discount if they purchase 5,000 pairs of the new shades in advance at $7.50 each (actual cost). So, your distributor gets $10,000.00 - $2,500.00 = $7,500.00 in commissions.
However, there is another factor that needs to be considered. This is called "chasing costs", which is the cost it takes for you to chase leads and follow up with them on an ongoing basis after you get an initial sell-through request from your distributor. This is often overlooked as another business expense, but in many cases it can be more expensive than the initial sale because you are chasing sales.
The formula is: Sales X Cost Per Sale = Profit.
Sales X Cost Per sale = Profit = $10,000.00 - $2,500.00 = $7,500.00 commission + $3,750.00 chasing costs + shipping/handling costs (possible) = $7,500.00 + $2,000.00 + ??? = Total: $8,750.00
The key to using this formula is to have a margin of at least 10% (cost of sales divided by sales). If you gun for a higher profit margin, your cost per sale will increase, which means that you need to give away more than just the product in order to hit your target profit.
Step 1: Calculate the Profit Margin (cost of sales can be found on the bottom line of your company's income statement). Use your industry standard and then multiply it by 10%.
Step 2: Calculate the Cost Per Sale (company's income statement - cost of sales). This is how much money you make on each sale.
Step 3: Calculate the Profit After Sales (sales x profit per sale). This is what your company makes in profit, not counting chasing costs.
Step 4: Total Up the Cost of Chasing Sales. These are expenses that occur as a result of making sales. Here are some of the common expenses that might be incurred: travel and entertainment, marketing and advertising, food, postage and shipping costs, credit card processing fees, trade show costs and booth fees.
Step 5: Find the Exact Cost of Sales for Your Companies Product. This is the amount of money you spend on orders to replenish stock as well as the cost of shipping and/or handling product to your customers.
Step 6: Calculate the Cost of Chasing a Lead. A lead is a person who has expressed interest in your product. It is less expensive to use sales motivating techniques (commissions, bonuses, incentives, etc.) than to go through all the trouble of chasing leads. There is only one situation where chasing leads is more cost effective than using a sales incentive with an existing customer, and that's when each sale costs significantly more to make than the profit margin (cost of sales can be found on the bottom line of your company's income statement).
The formula is: Profit After Sales X Total Cost of Chasing a Lead = Exact Cost of Sales.
Exact Cost of Sales = Profit After Sales X Total Cost of Chasing a Lead = $7,500.00 x $2,000.00 = $15,000.00 = Actual cost of sales for this product.
Step 7: Determine the Percentage Discount That your Product Needs in order to Achieve a 10% Profit Margin. The total cost per sale for this product is $10.00, which means that the 10% profit margin needs to account for profit after sales (sales x profit per sale). The actual cost of sales is $7,500.00, so the 10% profit margin + $7,500.00 = [(sales x profit per sale) + (cost of sales)] x 100 = 38%. In this case, your product needs a 40% discount in order to make a 10% margin on each sale.
Conclusion: One of the simplest ways to test how much you need to discount your product is to pretend you are a prospect, (or ask a real prospect) and then make an offer to buy your product for 20% less than what you would normally sell for. If they refuse, then go up until they say yes. Once you get that yes, then do the calculation in order to see how much an incentive will be needed if your company decides to give one.
If all of this math seems like too much work; it's probably because it is. It's not worth the time investment.