Calculating the Carrot

Sometimes we struggle with how to come up with dynamic lead-generation offers to woo our prospective target audience. As we all know, reaching people through dedicated opt-in email promotions is getting tougher as recipients become less tolerant of, and hence less responsive to, receiving them.

The sticking point often boils down to how much money to spend on the promotion, including the incentive offered therein. There are plenty of ways to do this, of course, but one of the most effective is based on a very simple series of calculations. What you ultimately end up with is what our company and clients affectionately refer to as CTC — our shorthand for “calculating the carrot.”

It’s not rocket science. It’s simply based on a few items that are specific to your business model… as well as a few assumptions you’d need to make based on industry standards and/or your company’s historical results.

First, ask yourself a few questions:

• What is your net profit — both on a percentage and a dollar basis — for each of your products and/or services?
• How many sales per month do you need to reach your goals?
• How many leads do you need to bring in the door each month in order to reach your sales goals? (In other words, what is your leads-to-sales ratio?)
• If you’ve generated leads through email promotions in the past, what have you seen as far as average response rates (clicks and conversions/registrations)?

Now you can start to build some offers and incentives.

Let’s go through a hypothetical example. Suppose you work for Company A, which sells Web-based software that does something nifty for a mere — oh, say — $99-per-year subscription price.

Your net profit is high — let’s say it’s 25 percent or approximately $25 per subscriber. Your goal is to bring in 1,000 new subscribers each month, or close to $100,000 in revenue and $25,000 in profit.

Based on previous lead-conversion efforts, which include telemarketing and direct sales calls, you know that you need to bring in 5 fresh leads in order to make a sale — so your ratio is 5:1.

Therefore, if you do the math, 5 leads equals $25 in profit. And if 5,000 leads equals $25,000, it’d take 5,000 leads to break even and meet your goals. So to break even, you need to keep your costs down to $5 per registered lead. And breaking even isn’t a bad thing considering all of your cross-selling and up-selling efforts down the road, once you have prospects in the door.

Now go back to your projected response on previous campaigns (or industry trends/research analysis of your particular market, if you haven’t promoted with email). For the sake of this example, suppose you’ve calculated a 6.5 percent click-through rate (CTR) and a 70 percent conversion/registration rate from there, based on prior response.

And if 5,000 is your registered-leads goal, that means that 7,000 people must click through (5,000/70 percent). To calculate the total volume that you’d need to email, simply divide the number of click-throughs by the CTR. In this case, you’d end up with a figure around 111,000. This is the number of people you’ll want to email — if and only if the cost doesn’t exceed your projected cost to break even.

Do the math again, using a $200-per-thousand list cost, and you’ll soon see your campaign is in line with your goals. Your cost for this campaign would be approximately $22,000, but if it brings in the aforementioned 5,000 leads, we’re talking a mere $4.40 per lead.

This means that if your goal is to break even, you have $0.60 per lead, or $3,000 for this particular campaign, to spend on the incentive, or carrot. Keep in mind that many marketers still budget to lose money when acquiring new customers and leads because they figure they will make money on the back end. If that is the case with your company, then do the same exercise, but adjust your numbers based on the loss you’re willing to withstand.

So what do you do with that $3,000? If you know your audience, you already have a good idea of what moves them to act. In the case of this particular example, maybe you don’t have to spend anything (perhaps you can offer a free 30-day trial). Or you offer the proverbial white paper, “worth X dollars.” Or maybe you offer something of high value to the first X number of customers who register.

So there you have it — one basic method to determine your incentive (and your campaign budget overall). A few proven calculations can certainly go a long way to coming up with an outstanding offer — and can even add some “crunch” to your carrot.