Meeting Companies’ Profit Objectives

As we have already seen, effective shopper marketing should deliver against the company’s profitability objectives. But what does that mean? Every activity should deliver a profit? And of course there are many ways to measure ‘profitability’ – so how should this be done?

Should all shopper marketing activity be profitable?

In an ideal world, every single activity (be it shopper marketing or otherwise!) would be profitable. But we don’t live in an ideal world. Activities are conducted for many reasons. We may need to invest in an important retailer for example. The program itself might lose money, but it still might be the right thing to do in the long term

Alternatively, we might want to invest in driving longer term consumption of our brand. Driving trial might cost a lot in the short term but only pay back in the longer term. One of my favorite shopper marketing activities ever lost a lot of money in the short term, but I’d still call it effective. A beer company in the UK spotted a consumption barrier – people weren’t drinking beer because it wasn’t chilled at home. Why? Because there wasn’t sufficient space in the refrigerator! The solution? Give the beer consumer a beer fridge! This was executed by giving away the fridges as a premium. The activity lost money but delivered massive value.

We should always have a financial objective

What is important here is that there is a financial objective, and that the activity meets that objective. That objective might be to lose money in the short term, but only a certain amount of money. An activity which loses more money than planned isn’t effective.

And critically, any activity which ‘loses money’ must be seen to deliver profit in the longer term by delivering a meaningful change in consumption behavior in the longer term – even though actually measuring this in the long term may be challenging.

What do we mean by profitable?

There are of course many measures of profitability, and this isn’t a finance program! But there is one that we would recommend. Your company or client may have their own way of measuring financial effectiveness, but our recommended measure is to consider Return on Investment (RoI). RoI considers the return relative to the cost of conducting the activity. It is simple to calculate – take the incremental profit and divide by the cost of executing the program.

Calculating Return on Investment

So let’s look at a simple example. Let’s say we sell a product at US$10 per unit, and the profit per unit is US$2. In a usual month we see 100 units, so our sales are US$1000, and the profit is US$200. We then run a shopper marketing program and sales go up by 50%: we sell 150 units. The program costs us US$100 to execute.

So our sales are now US$1500, and we can calculate our profit. The profit from the sales is US$300, but we had costs of US$100, so the actual profit was US$200. That’s the same as not doing the activity! So the RoI would be:

(Gain in profit – Cost of Investment) / Cost of investment = 0/100 = 0

A breakeven activity delivers an RoI of 0*

What is an acceptable RoI?

One could argue, given that data suggests that 70% of shopper marketing programs lose money, that an RoI of zero would be pretty good! But it really depends. Some businesses have a standard target RoI, which is called the hurdle rate. It might be useful to check what your company’s or client’s hurdle rate is. Not because every activity must hit that number, but if yours do, you have a much better chance of getting the investment you need!

The benefits of delivering against the company’s profit objectives

An activity which delivers against its profit objectives is much more likely to get repeated. Further, if you are pitching a program to your client or your boss, it is much more likely to be approved if it delivers a return (or even beats the company’s hurdle rate!). Even if the activity doesn’t actually make a profit, a shopper marketer, or agency, which delivers against the profit objectives will be seen as prudent and reliable and is much more likely to get support in the future. In a world where more and more pressure is being put on marketing and shopper marketing budgets, that isn’t a bad place to be at all!

*Note that there are alternative calculations for RoI – the key is to understand what your business or client uses, and to ensure that this is used consistently.

July 10, 2018