The marketing promotion is effective, but not profitable?

Many business leaders often ask us: We have carried out many marketing activities and the marketing results are good, but why is the company still not making money?

This is a problem we often encounter when providing marketing consulting and planning to companies and brands.

For example, at the end of 2018, I served a buffet project. Before we provided consulting and planning for them, we found that they had already carried out many marketing activities, large and small, such as giving away gifts, women's discount days, membership days, price cuts, etc. These activities attracted a lot of people, but they were still not profitable and were losing money every month.

Seeing this, you might say that it is because the company’s marketing activities are inconsistent with the strategic direction, there are problems with the company’s positioning, and so on. Well, these are common reasons, but after interacting with many companies or business leaders, I don’t think these are the root causes. Because many companies with good positioning, products, teams, etc. are still not profitable.

In the past year, I have provided marketing consulting and planning services to some companies, especially many physical stores and some chain brands. I also participated in the process of Party A's creation and operation (I experienced what it was like to be Party A and better understood the communication barriers between Party A and Party B), etc. These experiences have made me realize even more that the sustained profitability and success of a company or brand is determined and influenced by multiple factors and cannot be achieved simply by an idea or model. I believe that if you have had such an experience, you should know what I am talking about when you see this.

So, we discovered a very basic and important problem that many people who run businesses have not figured out, and even some of us who work in marketing (of course, I was the same before) - they don’t understand how businesses make money.

In other words, many people only engage in marketing activities for the sake of marketing activities, and produce products for the sake of products, without thinking through the basic profit logic. Because only when you understand the basic profit logic of the enterprise can you know what the problem is for the enterprise's unprofitability, and where the marketing activities and management should be focused at this time, so that the enterprise can truly achieve profit growth.

Because many people who do marketing pay too much attention to external factors and not the internal logic of making money in the company, they often make seemingly good efforts to attract traffic and promote, but when the boss does the math, there is still no significant profit growth.

(Let’s put aside the examples of brands with different strategic plans. For example, Luckin Coffee’s profit model is different from that of most companies, so it doesn’t matter if it is not financially profitable for the time being. Because most companies do not have the resources and capabilities to follow a model similar to Luckin Coffee, so I won’t go into details here.)

Seeing this, some people may say, isn’t it that companies make profits by selling products and earning the difference in price? Some people would say that they can achieve profitability by monetizing platform traffic (advertising, e-commerce, etc.), and then continue to grow and earn franchise fees...

These statements are not wrong. Selling products to make a profit (such as small vendors, agents, etc.), building brands to make a premium (such as Coca-Cola), building platforms to achieve diversified profits (such as Alibaba, Tencent, etc.) are all common models we use, as well as Kotler's STP and 4P and other marketing strategies. However, when we find that no matter how we organize activities and adjust strategies, the company cannot make a profit, we should return to the company's original logic of making money to think about the problem and find solutions.

So, what is the basic logic of a company’s money-making?

Today I will use three basic formulas to help you re-understand the internal logic of making money in the enterprise, so that we can choose effective marketing strategies to help achieve corporate profit growth:

Sales (Revenue) = Traffic * Conversion Rate * Average Order Value (User Value)

Profit = Revenue – Cost

Return on equity = profit margin * asset turnover rate

After looking at the above three formulas, anyone who knows a little about economics should know that these are very basic formulas. (Are you feeling disappointed? Why did Mr. Monster give us these boring formulas!) However, these three formulas are the most effective theoretical tools for us to understand how companies make money.

Students who are engaged in marketing, we should understand, what is the purpose of our marketing planning for the enterprise? It shouldn’t be the case that a marketing plan looks creative but is useless, right?

The ultimate goal of marketing is to enable a company to achieve profit growth . Whether you are selling products, building a brand, or building a platform, or brand positioning, or various strategies, or creating value, or delivering value, etc., the ultimate goal is to achieve profitable growth for the company. It’s just that a brand or platform requires initial investment and construction, and only then can the brand or platform value be used to promote product sales or other income and ultimately achieve corporate profitability.

There are many theories in this process, and Mr. Monster has simplified many factors. This time, let us return to the most fundamental purpose of the enterprise to look at our marketing and management - if we want to achieve corporate profitability, we must understand the basic logic of profitability within the enterprise, and then break it down, and achieve ultimate profit growth through various marketing strategies, operation teams, resource integration, etc.

Okay, let me briefly explain these three formulas (readers who already understand can skip this paragraph and go directly to the content below), and then tell you the five basic directions of our marketing for enterprises.

A: First of all, the formula " sales (revenue) = traffic * conversion rate * average order value (user value)" is very familiar to those who do e-commerce. But this formula applies to most businesses, and some people call it the universal business formula.

This formula is easier to understand. Among them, this income, strictly speaking, covers the income from the main business and other businesses, and can be regarded as the total income of the enterprise here.

Traffic, conversion rate, and average order value are variables that I can cite as examples:

For example, you opened a restaurant and calculated that 1,000 people passed by the door every day - these 1,000 people are the natural traffic of your store; then 400 people entered your store and made purchases - at this time your store's conversion rate is 40%; finally, these 400 people each spent an average of 100 yuan - the average customer spending is 100 people. So, your store’s daily sales are 1000*40%*100=40,000 yuan (this is an amazing sales amount for a restaurant).

Having said that, I believe you should understand.

B: Next, let’s look at the second formula: “ Profit = Revenue – Cost”. This formula is easy for many of us to understand. It is your total income minus all costs, and the remaining amount is your profit. Income, as mentioned above. I will talk about the cost later, so I won’t go into details here.

C: Look at the last formula: "Return on equity = profit margin * asset turnover rate". Compared with the above two formulas, this formula is rarely used and is more difficult to understand. (The derivation of this formula is too long, so I won’t write the derivation process. Interested readers can check it out online.)

What is " return on equity "? This indicator can reflect the ability of an enterprise to obtain net income from its own capital. Simply put, it means how much money you earn back in the end based on the capital you invested . Both of them want to make 100,000 yuan, but A invested 1 million yuan and B invested 10 million yuan. Who do you think is more capable?

This result can come from two aspects. One is the profit margin . For example, if a pair of shoes sells for 300 yuan, and after deducting all costs, the profit is 50 yuan, then your profit margin is 50/300=16.67%.

Another variable is " asset turnover ", which is what I will talk about below. For example, A and B both have a capital of 1 million, but A turns it over 10 times in a month, while B only turns it over once. It is obvious that A's asset turnover rate is higher than B's.

Through the above simple explanation, we understand the basic meaning of these three formulas. At the same time, we should also understand what the basic profit logic of the enterprise is. Through these three formulas, we want to achieve the ultimate profitability of the enterprise (increase profits or return on assets), with the following five basic directions:

1. Increase the number of users
2. Average order value (user value)
3. Cost Management
4. Increase asset turnover
5. Finding “growth levers”

After considering the above five internal profit logics of the enterprise, and then combining them with various external strategies, marketing operations, resource coordination, etc., perhaps you will understand better why many marketing activities seem to be "successful" but ultimately fail to bring any profit growth to the company.

For example, the catering project mentioned by Mr. Monster earlier. Although this restaurant has been carrying out various marketing activities in the past, they only designed marketing activities at the level of "increasing the number of users", but have never made any improvements in user value (such as user average order value and retention) and cost control. Such a marketing strategy resulted in a certain amount of users being brought in through promotional methods such as price cuts, but costs were not well controlled and user repurchase (user value) was not well managed - resulting in a low profit (profit = revenue - cost).

Then every marketing activity is actually chronic suicide - because most offline catering stores do business in the business district within 3 kilometers, and user traffic is limited. If the user value cannot be improved and the company's own costs cannot be optimized, it will easily go into a loss-making situation.

Therefore, our subsequent marketing strategy for this store was to increase user value by optimizing the product's sense of value, repositioning the restaurant, and improving the service system, and then reduce costs by optimizing the supply chain and labor efficiency, and finally to achieve profitability through further traffic introduction plans.

I believe you are a little tired after reading this. However, the above five aspects still need to be briefly explained so that you can understand them more easily in practical application.

1. Increase the number of users

Increasing the number of users is the most common way for a business to achieve growth, and it is also the goal of many of our marketing activities. For example, common ways to increase the number of users include advertising, price reduction promotions, and leveraging marketing.

The number of users is the basis for any profit model. Whether you are building a brand or adopting a platform model, ultimately you need people to consume your products and services in order to achieve single or diversified revenue.

The "number of users" I'm talking about here, in the first formula mentioned above, is the result of "traffic * conversion rate", that is, effective traffic. For example, if the natural traffic of your store is 1,000 and the conversion rate is 40%, then your user base is 400.

There are many articles online that talk a lot about how to increase the number of users, that is, how to attract traffic. Based on the variables in the formula, here I would like to give suggestions in two directions from two aspects:

1. Increase traffic

Traffic is divided into paid and free traffic.

There is no need to say much about spending money , it is just spending money to buy traffic, and the main thing is to find a promotion strategy and channel that suits you. It doesn’t cost any money, the focus is on our organic and existing traffic. For example: offline stores are passers-by passing by your store, and e-commerce stores are user traffic that sees your store when searching. Offline, you need to optimize the door design, store name and advertising slogan to increase the conversion rate. Online e-commerce focuses more on optimization of keywords, display interfaces, etc.

The existing traffic means we need to make good use of existing users to help us with secondary dissemination. This requires the design of a user forwarding incentive mechanism and the optimization of the product's self-propagation.

For example: Last time, I went to a "Tai Er" pickled fish restaurant in Guangzhou with my friends. I found that the various designs inside made me want to take photos and forward them, and then I forwarded them involuntarily. Some people saw my sharing through my circle of friends and might become customers of this sauerkraut fish restaurant (see, now I’m promoting “Tai Er” again).

1. Improve conversion rates

Improving the conversion rate of traffic is also a key factor affecting final revenue. There are many techniques covered here, and I have also talked about a lot in my previous articles.

One point that needs to be emphasized here is that some people put the cart before the horse and focus on increasing traffic right away. In the end, they often attract traffic to their store, but it is short-lived and fails to retain users. If there is no internal optimization and the conversion process is not done well, no matter whether you spend money or get natural traffic, you are wasting traffic. Therefore, before attracting traffic, you must ensure conversion retention.

2. Average order value (user value)

When seeing the average order value, many people have a misunderstanding, thinking that high prices are good and low prices are bad - in fact, price often affects your user base.

Whether the product price or increased service price is higher or lower than that of your competitors has to do with your entire system and the external market environment.

But if you are in a market where your low prices prevent you from surviving, then you must consider the user's perceived value before raising your prices. Because users may not understand your costs, and they don’t care that you cannot survive with low prices. Users only care about the price and whether the value it brings to users is worth it. For example: the same bottle of water, Master Kong sells it for 1 yuan, while Evian can sell it for more than 10 yuan. This is the premium effect of the brand. The same cup of Coke costs 3 yuan in a convenience store, but more than 30 yuan in a western restaurant. This is the role of the scene.

Therefore, we must understand the relationship between price and user volume, as well as the user value perception behind the price, rather than simply setting prices based on cost.

Let me say more about the user's sense of value here.

Many people who run traditional businesses often believe that cost and price are directly linked. For example, if the total cost of a bottle of water is 5 yuan, then selling it for 6 yuan seems reasonable - but users are not willing to pay for it. Users don’t care about your costs, they only care about their own feelings. Therefore, if we want to match price and value, we must pay attention to the user's sense of value.

For example, when we raise the prices of a company's products, we will also optimize the product's brand positioning, packaging design, sales channels, etc., so that users can perceive the value of the product and be willing to pay a high price.

3. Cost Management

This is an aspect that most marketers do not consider. This is also an important reason why many marketing strategies appear to be "successful" but still cannot help companies achieve profit growth.

Many people think that by increasing sales, a company can increase profits. But if your costs are not managed well, then in a competitive market with the same positioning and resources, others will make profits while you will lose money, especially in a perfectly competitive industry.

For example, in the catering industry, if you can achieve lower costs than other competitors while maintaining the same price and product value, you will have more advantages - you will have room for profit, more current assets to achieve a higher turnover rate (discussed below), and thus have more capital to achieve more growth or other improvements.

So, what does the enterprise’s costs cover?

To make it easier to understand, Mr. Monster will classify costs based on their form and talk about fixed costs and variable costs. I believe many entrepreneurs should understand these two concepts.

Fixed costs are fixed expenses that do not change with the increase in sales volume, such as rent for physical stores, amortization of equipment investments, and monthly basic human resource wages. These costs have already been incurred regardless of whether you have sold anything this month. Variable costs are the costs you incur each time you sell a product. For example, the cost of raw materials, cups, etc. when you sell a cup of milk tea.

Having written this, do you understand the method of cost management?

Since fixed costs are immutable, we must start with variable costs to optimize our variable costs. Therefore, the most important thing about cost management is to manage our variable costs.

At this time, you need to optimize your cost structure based on your industrial chain, management costs, etc., save where you can, and never save where you cannot, so that you can maximize the use of funds. (This requires close cooperation between marketers and business leaders to accomplish this)

For example: reducing the restaurant's variable costs by optimizing the restaurant's labor costs, food loss rate, and supply chain.

For example: Haidilao, due to the many chain brands and brand effects, has cost advantages in the supply chain and shopping malls. However, Haidilao spends 36% on wages and training (higher than most restaurants). This is because the value Haidilao wants to highlight is service, so it cannot save money in this area. This is why many people cannot learn to cook Haidilao.

Another example is the famous clothing brand called ZARA, which chooses to open stores in top shopping malls, next to luxury brand stores. However, its prices are several times cheaper than those in luxury brand stores, and its styles are the newest and most trendy - they are popular with many people. ZARA has chosen this strategic direction and is able to achieve such high cost-performance while ensuring profitability, so cost management is very critical.

For example, ZARA seldom advertises and does not hire celebrities to endorse its products (you know, many luxury clothing brands do hire celebrities to endorse their products). The money saved from these aspects is invested in designers (to ensure that there are enough people to design different styles as quickly as possible) and logistics management (to ensure that they are delivered to stores as quickly as possible), etc.

So, if you also want to follow the ZARA brand route, first make sure your cost management structure is the same. However, no one can imitate a successful brand casually, because there are barriers of the entire industrial chain and system behind it.

In short, when doing marketing, you cannot just focus on traffic, you also have to manage your costs. Cost optimization often comes from being guided by user perception of value, rather than “I think it’s worth it.” Just like we have met many business owners who think that if the material of a product is good, users will also think it is good - in fact, users do not care about the cost of the product like business owners do, users only care about their own feelings.

4. Increase asset turnover

This part is something that marketers rarely consider, but it is very important for a business to achieve faster growth.

For example, there are two people who are both very rich, but they don’t know what to do. A has 300,000 yuan and B has 3 million yuan. A invested in a small shop of more than ten square meters specializing in grilled chicken steak, and B invested in a Chinese restaurant of more than one thousand square meters. Putting aside factors such as product selection and management, on the surface, B seems to have more advantages and should make more money.

But in reality, A often makes more money, that is, A's return on net assets will be higher.

Why?

Because A has a higher asset turnover rate, just think about the compound interest formula and you will know that if A has a higher profit margin, the final return will be more advantageous as time goes by.

For example, some brands that operate terminals, such as Gome Electrical Appliances, often purchase the goods first, sell them, and then pay the suppliers. This will further improve Gome's asset turnover rate. For example, you can use the money to open more branches or do advertising - even if the profit margin is not high, the final rate of return can be increased through high asset turnover.

There are many more business models behind the asset turnover rate. Interested readers can go online to take a look. For example, many car dealerships are involved in financial business, which also helps to increase asset turnover and achieve higher returns.

Of course, the author is not encouraging everyone to invest in small stores instead of large stores or to do financial business, but rather to choose a profit model with a higher asset turnover rate. In the long run, you will make more money back (increase return on equity). However, there are not many companies in the market that can achieve this, but it is good to understand this.

Okay, let’s talk about the final growth lever.

5. Finding Growth Levers

This part is equivalent to the sublimation of the above four directions.

The growth lever I'm talking about here was first proposed in the book Growth Hacker:

Find an “aha” moment, and amplify it. This “aha” moment is the feature that surprises users the most and makes them want to buy more. It is also the point that is different from other competing products or the point that has not yet been discovered.

For enterprises, they can also look for this growth point in the aspects mentioned above, and then amplify it with leverage. For example: If you find that your conversion rate is higher than that of other peers, you can use the "hypothesis-test-optimization" method that Mr. Monster mentioned before to find specific points and then zoom in. (Use this method to avoid detours in your marketing ideas)

For example, some restaurants have found that customers particularly like the dish of pickled fish, and the feedback is very good. Then we promoted it as a hot-selling product. Later we verified that this dish really attracted more users. Finally, we made this dish a single product franchise brand. This is an example of growth leverage that we sometimes see. For example, the "Tai Er" pickled fish I mentioned earlier is one example.

In short, find the growth point of your business's "aha" moment and then amplify it - this is also the direction for the company to achieve faster growth.

Summarize

Regardless of whether you have read this process carefully or not, I hope you just remember this sentence: If you find that no matter how many marketing activities or industrial chain or strategic adjustments you make, you cannot achieve profitability for the company, then go back to the company's underlying profit logic to see where the problem lies.

The five most basic directions are:

1. Increase the number of users;
2. Average order value (user value);
3. Cost management;
4. Increase asset turnover;
5. Look for “growth levers”.

Finally, 2019, I wish everyone a happy Year of the Pig!

Source: Mr. Monster (ID: Mister-shou)