Dear reader, the retail season is coming! Are you thinking about creating some ads to promote your business on Facebook, Google, or other social media platforms like Pinterest? Great! Let’s talk about a budgeting scenario to ensure those Ads are fruitful!
Our Scenario: Teddy Co.
Congrats! You’re now the CEO of Super Bear Co., selling the best Teddy bears in America at $100 each!
Your Cost of goods sold is $80, so you have $20/bear to play with your profits & your Ads campaign expenses.
Two key metrics for our budget
We’ll define two metrics and create a budget.
- Cost per click (CPC): how much does the Advertising company charge you each time a user clicks into your Ad. At Google & Facebook, you can create Ads with a fixed or auctioned (variable) CPC.
- Conversion Rate (CR): the proportion of visitors to your website who buys your product.
While CPC & CR values vary a lot per industry, let’s define ours as:
- CPC: $0.50
- CR: 5%
Our 5% CR means that 1 out of every 20 visitors will purchase our bears (20 = 100/5). Multiplying this per our CPC, each bear sold cost us $10 (20×$0.50), reducing our profits from $20 to $10 & thus giving us an EBITDA of 10%. If you want to sell a given number of bears, calculating your budget is a simple as:
Budget = $10 × Number of products + Cost of Art/Video & Copywriting
Another scenario would be:
- CPC: $1.00
- CR: 4%
Following the same calculation, each bear sold cost $25 (100/4 × $1.00), giving us a loss of $5 per unit. You need to improve those Ads numbers pronto!
Let’s say you want an EBITDA of 15% to keep your business healthy. You can calculate your maximum CPC by applying the formula:
max CPC = ((Sale price – Cost of the good) – (Sale price × Margin%)) / (100/CR)
max CPC (=) Sale price (-) Cost of the good (-) Sale price × by the margin (as a percentage), all divided by 100 divided by your CR!
Tax deductions of your Ads
You probably noticed that we talked about EBITDA & not P&L. Why? Because your Ads expenses are deductible, giving you a break with Uncle Sam! Do you want to know more about how to do this?
Write us a message! The IOOGO Tax team is always ready to assist your business with its Tax needs!
