How much money do you want to make online and what are your margins? These are the first questions we ask our clients. With this information, we use the Profitable Revenue Formula (PRF) to account for costs and establish initial assumptions. The basic revenue formula defines success for digital retailers. It outlines the 4 primary areas where digital retailers can build profitable sales. The Profitable Revenue Formula is as follows:
(Visitors X Conversion Rate X Revenue per Order) - Costs = Profitable Revenue
10,000 X 1% X $100 ($10,000) - $2,000 = $8,000
Each variable of the PRF is a determinant of digital success. Each variable is also influenced by other variables. The quality of visitors can affect conversion rates, average order size and costs. The average order size can influence the conversion rate and the cost to reach consumers. It’s rare for one metric to change without impacting another. Available markets for specific brands can also impact visitors, conversions and costs. What’s more, markets change.
Focusing on profitable revenue requires a more holistic approach to digital marketing. It isn’t based upon a specific tool or tactic. Instead, it offers guidelines on which strategies are developed to generate profitable conversions. Strategies determine the tools and tactics selected. Thus, it demands a broader skillset that is focused on business outcomes rather than just technical processes. Often, over-specialization hinders the ability to generate profitable revenue – creating silos that serve a narrow profession rather than ROI. When all you have is a hammer, you define success as hitting nails – rather than generating profitable revenue.
For digital marketers, the question isn’t how many “clicks” or “likes” get generated – but what influences the greatest number of people who are most likely to buy at the lowest cost. Sometimes this means search, content marketing, display advertising, social media, conversion optimization or better messaging. Through market testing, the best tools and tactics become obvious. The ability to test around profitable revenue, however, requires more than one tool in a marketer’s toolbox. Besides an understanding of multiple channels, success depends upon the ability to measure results within a larger context.
The larger context involves an understanding of how consumers buy and brands are built online. Without this understanding, the ability to generate profitable revenue from any channel is more difficult – and accidental. For most retailers, silos within the digital marketing profession have ensured that this understanding is hidden in plain sight. Within the data and analytics of every retailer and brand, this understanding is waiting to be discovered. When it is, marketers can focus on building brands and profitable revenue -- since brands are where profitable revenue comes from.