Ever notice how even the best marketing plans can fall flat on their face once implemented? Why take on huge risks when you don’t have to? The very best marketing plans model time-tested ideas already proven to provide a great return on investment (ROI). I’ve got one of those winners here, which is so tested and proven it shows you how to calculate your expected ROI before you even take the plunge. It’s all right here…
Tried and Proven
If ever there was a marketing method that’s been thoroughly tested – and ‘passed with flying colors’ – it would have to be loyalty and gift card marketing. Gift and loyalty cards are everywhere. All the major retailers issue them. In fact, you probably have one or more in your purse or wallet.
Here is how effective gift card marketing has become:
- In the year 2000 paper certificates and plastic gift cards each raked in about $10 billion dollars. By 2007, gift cards outsold paper gift certificates to the tune of $95billion – $5 billion.
- In 2008 50 million adults purchased at least 1 gift card. Of those which were redeemed, 61% spent more than the original dollar amount of the card!
- Counting all age groups 83% of Americans use gift cards, and 54% of them make more than 1 trip to the store while using up it’s value.
- And 33% of the total card value never even gets redeemed by the gift recipient – making it pure profit for the store!
That doesn’t even count other major benefits such as an average float of 3 months on revenue from card sales; faster and easier transactions (sales are easily batched out and reconciled at the end of the day because it’s all electronic); plus, because of online tracking and reporting capabilities, it’s far easier to capture customer information and track a customers purchasing history.
Now let’s look at how easy it is to conservatively forecast a merchants return on investment (ROI) from a well orchestrated gift or loyalty card marketing plan.
Formula For Determining Net Profit
First, let’s put together a small 1 year campaign, using 500 cards at a cost of $1.00 each. We’ll also assume a terminal ‘swipe fee’ of.25 a transaction, with card usage averaging out to 3.2 swipes per card, and a monthly account service fee of $10.00 per month.
Using these figures our COST FOR THE PROGRAM works out at follows:
- 500 cards at a cost of $1 each comes to $500.00
- Next, we calculate 3.2 transactions for each card, with a fee of.25 per transaction equals $400.
- Finally, we need to add in our $10 service fee times 12 months for a total of $120.
- Adding all costs together we come up with $500 + $400 + $120 = $1,020.00 in costs for the year – which is far less than what 6 months of charges for a small yellow pages ad (which is hard to track)
Next, let’s work out the expected REVENUE:
- For this example we’ll go very conservative and assume a $25 face value for each gift card. 500 cards at $25 each comes to $12,500.00 in card sales
- Because shoppers always spend more than the value of the card we’ll use a conservative increase of 17% of the actual face value of the cards, times 500 cards equals another $2,125.00
- We now have a total card revenue of $14,625.00
How To Get to The Net Profit and ROI
But as we know – revenue and profit are two different things, because we also have to account for the cost of goods sold. Assuming a 20% profit after cost of goods sold we now have a total profit margin of $2,925.00. But we’re not through yet!
Next, we need to add in the percentage of profit from cards that never even got used by the recipient of the gift card. Perhaps the card was sent as a gift and was lost in the mail. Perhaps it was misplaced. Maybe it just got put into a pile of “things to do” that never made it to the store. Who knows? We simply know that 10% is a conservative estimate of what we can expect will never be redeemed. 10% of $12,500 comes to $1,250.00.
Add $1,250.00 to the total profit margin of $2,925.00, and we now have a total gross profit of $4,175.00. Now for our last step:
We take our $4,175.00 of total gross profit, and subtract from it our total program costs of $1,020.00 for a net profit of $3,155.00!
Finally, we’ll use an ROI formula of ROI = (Gain from investment – Cost of Investment) / Cost of Investment. Therefore, $3,155.00 – $1,020.00 = $2,135; $2,135 divided by $1,020.00 = 2.0931372, or a 209.3% ROI! Not bad at all!