Marketers usually have a strong reaction to the word “finance”. You either love digging into the P&L and reading about quarterly earnings, or your eyes glaze over and your mind starts to wander.
But if you want to win buy-in for increased media budgets, or even build and sell your own brand one day, it’s helpful to understand how finance types view the world and make decisions.
Marketing is responsible for running profitable ads, but financial planners, investors and accountants need to ensure that the entire business is profitable.
Doing so requires the oversight of a lot of moving parts–producing the goods, marketing the goods, and keeping the lights on all have their own nuances.
This is why a decision that feels like a slam dunk for a marketer can elicit raised eyebrows from finance.
It’s also why some brands that appear to have minimal chances of success get funded, while other brands with solid fundamentals struggle to find investors.
To avoid this frustration, we need to step inside the finance mind. But don’t worry…we’re going to limit it to the three most impactful concepts and make them relevant for marketers and entrepreneurs.
So let’s throw on the Midtown Uniform to get in the mood, and get started.
What It Is:
But where do those benchmarks come from? If you’re working at an agency, they usually come from the client.
And if you’re working in-house, they typically come from finance or from executive leadership.
If the business is well-run, these targets are probably based on contribution margin: the sales price of an item minus all variable costs involved in selling it.
Variable costs increase as you manufacture and sell more of your product–these are costs like the cost of goods, the cost of shipping, and even apps and marketing services that charge a per-transaction fee.
Your annual sales forecast and campaign benchmarks are based on the average contribution margin you expect to earn from all the items the business sells.
But that doesn’t mean every item is an equal contributor. Some products may require margin-dilutive markdowns to move, and heavier products cost more to ship.
Products with high return rates eat away at total profitability because many of the variable costs associated with the sale are not refunded.
Why It Matters:
There are two main reasons contribution margin is relevant to marketers:
The first reason is that some marketers have misconceptions about what it takes to make a profitable sale. If you spend $100 on Facebook ads to sell one unit of a $100 product you haven’t “broken even”.
You only covered one of the costs of making the sale–marketing. You still need to cover the cost of producing the item, listing it online and shipping it to the customer.
The second reason is that contribution margin opens up a new set of opportunities to scale your marketing spend. The ROAS or MER target you receive is based on the brand’s average sale.
But if you’re able to build out a marketing funnel that drives more profitable sales you can advocate for a less aggressive efficiency target, which can enable you to scale spend.
For example, let’s say a skincare brand has a MER target of 30% based on the following average costs:
You’ll make a profit of $40 on each $100 transaction before marketing costs are factored in.
If you hit your MER target it will cost $30 to make the sale and you’ll walk away with $10 in profit. Not bad!
But what if you dig into the data and find out that sales of your men’s shaving line have a lower return rate and lower cost of goods than the average sale? If you set up an ad and landing page funnel featuring this line, you can achieve the following:
You’ll make a profit of $60 on each of these $100 transactions before marketing costs, giving you more breathing room in the budget.
You can either scale spend at a more generous MER target or stick with the original benchmark and pocket some extra profit.
Once you understand the inputs driving your brand’s contribution margin, you can make your marketing more efficient by being strategic about what products you promote.
What It Is:
In retail, it’s possible to generate a lot of hype, demand and sales…and still lose money.
If you don’t believe me, read up on the story of Ample Hills ice cream company, one of many retail brands with a white-hot rise to fame and even steeper tumble into insolvency.
The key to keeping money coming through the door is understanding the difference between accrual and cash accounting.
Accrual Accounting focuses on anticipated earnings and expenses. Monthly budgets you receive as a media buyer or an eCommerce manager are typically based on the accrual method of accounting.
Cash Accounting focuses on when bills are actually paid and sales are actually realized–aka when the money flows into or out of your bank account.
Why It Matters:
If you own an agency you may charge a client $5k for services performed in the month of March. But the client has 30 days to pay the invoice, so you don’t get the money in hand until April.
You might want to purchase a training course for your team in March based on the services you booked, but you wouldn’t have the funds to pay for the course until April.
If businesses don’t think carefully about the timing of revenue and expenses they may literally run out of money, even if the financial statements appear to show a profit.
This is why your finance team will always push you to negotiate with vendors and push back on partnerships where negotiation is not an option. Shopify apps are a perfect example.
If the app has a customer service email manned by a real human, it’s likely that you can negotiate payment terms or fees. But if there are no humans involved in the process, you’re probably out of luck.
Your ability to negotiate is based on your relative power in the relationship. If you represent a large percent of a vendor’s income, you have more leverage.
But if you’re one of a thousand users each paying $5 per month, the prospect of a single client walking away matters less.
This is also why the timing of your eCommerce calendar matters. If you run a promotion in January that drives a lot of sales volume, but returns are allowed, a bunch of those returns will actually take place in February. So if February is a slow month you might wind up with very little cash on hand.
Cash flow concerns are the reason P&L owners often doubt the value-add of higher funnel marketing. Getting a return on your marketing dollar same-day is more attractive than waiting weeks or months for the sale.
It’s up to you as a marketer to empathize with these concerns and explain the need for the strategic use of higher funnel campaigns.
What It Is:
Would you rather have $100 today, or $100 a month from now? Most of us would answer “today!” in a heartbeat. The future carries the risk of the unknown: will inflation eat into the buying power of that money? Will I skip town before I can give it to you? Will you die in a tragic accident before the month is up?
That uncertainty factor is the intuitive concept behind the Time Value Of Money.
But like many things in finance, someone decided to create a precise mathematical formula to quantify a gut feeling.
If you wanted to determine how much $100 a month from now is worth today, you would discount it by the opportunity cost of having the money in hand today.
If you had $100 today you could do a lot of different, relatively passive things that would generate even more cash. You could buy US Savings Bonds–the lowest risk option–invest it in an index fund or sink it into an NFT.
The opportunity cost varies based on the context. When a company is trying to decide if they should invest in a resource-intensive new venture, they’ll use the rate of return that the company currently earns on average.
If you’re interested in a deep dive on the topic, you can learn more here.
Why It Matters:
You can think of your acquisition efforts as an investment and use the principles behind the Time Value Of Money to determine how much you’re willing to pay for a customer.
Many customer lifetime value calculations look too far out into the future. This can cause a brand to overestimate how much it can afford to spend.
Your average customer may spend $50 on their first purchase, and $175 within their first year. Some marketers might argue that this means you should spend up to $175 to acquire a new customer.
But that ignores the opportunity cost of waiting so long to make back your marketing investment. It also ignores the risk behind the wait–as we’ve seen in the past few years, a lot can change in your business in a short amount of time.
Time Value Of Money becomes even more powerful when you break down cost of acquisition by marketing channel, product, or time of year and compare the relative value of different customer cohorts.
On average, you may be able to profitably spend $50 to acquire a customer. But after drilling into the data you might find that customers acquired in June tend to spend more and repurchase much sooner.
So you could profitably spend up to $100 to acquire a customer in June, giving you more runway to scale spend in that month.
The principles of finance are the foundation on which most businesses are built. They’re also the foundation of the KPI metrics marketers use to manage ad spend.
You can take the KPIs you’re given at face value, but developing a deeper understanding of finance will unlock an extra level of opportunity to scale spend profitably.
These three concepts are just the start. If you’re a marketer, why not grab coffee with your accounting, finance or inventory planning teammates and learn more about what they do?
You’ll both gain a deeper understanding of how the business operates, and you’ll probably develop even more ideas to drive growth.
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