When it comes to making money on TV, there’s just one question you need to answer: What’s your break-even?
At this point, you may be thinking, “Well, what exactly IS a break-even?” It’s obviously the point at which you break even financially on your campaign, but how exactly is that calculated in the ‘As Seen on TV’ business? This article will help you figure that out. (There’s even a link to a handy spreadsheet at the end that will do the basic math for you.)
First, let’s get more specific about what number people in this business are talking about when they talk about a “break even.” It’s a dollar amount, and it represents the cost per order (CPO) at which a TV sale neither loses money nor makes it. For those who don’t know, the CPO is the main Key Performance Indicator (KPI) used in the ‘As Seen TV industry. It’s calculated by dividing the cost of advertising (spending) by the number of orders it generates. Let’s say you spend $10,000 to advertise your commercial on national cable over the course of one week. That spending generates a total of 1,000 orders, which are captured by your Website and your telemarketing company (i.e. phone orders). Your CPO would be $10,000 divided by 1,000 orders, or $10. (By the way, that would suggest you have a huge hit on your hands!)
So how does the break-even metric figure in? Well, here’s a question in answer to that question: Does a $10 CPO mean you made money? How do you know?
The answer is the break-even calculation, which results in a break-even CPO number. In a nutshell, you take the average sale (aka average revenue per order), subtract out all costs per order that aren’t advertising costs, and what you have leftover is the number at which you will break even on your advertising expense. For example, let’s say the average sale for those 1,000 orders was $45. Let’s also say that when you add up all non-advertising costs and divide by 1,000, the non-advertising cost per order is $30. That would mean you have $15 per order left over to spend on advertising before you start to lose money. In other words, your break-even CPO (which, again, means your break-even advertising CPO) would be $15.
So, in the example, did you make money or lose money? Well, that’s simple. You had up to $15 per order to spend on advertising. You ended up spending $10 per order. Do the math and congratulations: You made $5 per order!
Now, let’s say you only generated 500 orders on that $10,000 in ad spending. That would make your actual (advertising) cost per order (CPO) $20, and that would mean you lost $5 per order – because your actual CPO was $5 above your $15 break-even CPO. Pretty simple, and yet quite powerful. This is how experienced ‘As Seen on TV’ marketers know at a glance how well or how poorly they did during any given week. They know their break-even CPOs, and they get regular reports showing their actual CPOs for comparison.
Of course, losing money on every TV sale isn’t necessarily the end of the world when your advertising is also driving massive sales at retailers across the country. That’s why veteran marketers think more about “allowable” (i.e. allowable CPOs) than break-evens. An allowable is simply a break-even CPO plus an acceptable loss per order that’s based on profit calculations from retail.
The last thing worth mentioning is all the types of non-advertising costs that go into that part of the calculation. The most common costs are broken down and listed as line items. They include the cost of goods (i.e. cost to make and deliver the product to a warehouse), the cost of processing and shipping the product to customers, and estimated dilution costs such as product returns, credit card chargebacks, and so on. Each of these costs involves proper due diligence and regular updating to be sure they are accurate and that your break-even (or allowable) KPIs are adjusted accordingly.
If you are feeling overwhelmed at this point and definitely know you will need help figuring all of this out, we’re here to help!