Campaign profitability thresholds

When you're running multiple marketing campaigns through a complicated mix of channels, it sometimes becomes easy to get distracted and forget how your business should be judging its marketing spend.

99% of the time, the answer will be to grow profitable campaigns.

When is a marketing campaign profitable?

I find it easiest to approach this subject from the angle of a single cohort, rather than a single marketing campaign.

Every marketing campaign has two thresholds for which you need to account for. The cohort generated as a result of the marketing campaign must:

1. Pay for the marketing campaign costs
2. Pay for the proportional overhead expenses

If you were to plot the total cumulative cash generated by a cohort over time, the curve would generally look as above. When the cohort begins to generate money, it will first reach the threshold of paying back your marketing cost - this point is represented by the yellow dot and is termed contribution breakeven. From this point forward, as the cohort continues generating revenue, any additional revenue is contributing to fixed overhead expenses such as wages and facilities. In order to account for all sources of spend within your business, you must calculate a proportional overhead multiplier that defines how much additional overhead cost each incremental dollar of marketing spend must return. This second threshold marked by the green dot above shows the point after which your campaign is profitable. The level of profitability that your business generates is dictated by whether your cohorts are contribution profitable or EBITDA profitable.

These two basic profitability thresholds will apply to all marketing campaigns, regardless of whether you're a brand or direct response marketer. Your ability to attribute revenue directly to either of the two, however, is defined by your attribution modeling definitions.

How to calculate proportional overhead multiplier

The proportional overhead multiplier is a simple ratio of marketing spend to overhead spend.

Let's use an example:

• 1 month marketing spend $100k
• 1 month overhead spend $150k

Your total spend in this example month is $250k. For every $1 of marketing, you spend $1.50 on overheads. Therefore, your proportional overhead ratio is 1:1.5, or 1.5x.

Therefore:

• A $300 campaign would need:
  • $300 in revenue to be contribution positive
  • $750 in revenue to be EBITDA positive ($300 + ($300*1.5))
• A $36k campaign would need:
  • $36k in revenue to be contribution positive
  • $90k in revenue to be EBITDA positive ($36k + ($36*1.5))

Apply this ratio against your cohort constraints to find the amount of additional overhead spend your campaign must generate in order to move from contribution to EBITDA profitability. 

Remember about gross margins

When calculating the total revenue generated by a cohort, a mistake that's easy to overlook is forgetting the input costs associated with the actual product you're selling (i.e. raw materials, transport charges etc.). Once these additional costs are taken out of your product revenue, you will be left with the gross margin of your product. 

Profitability is dependent on your cohorts breaking even EBITDA at the GM level.

Here's a basic decision process for judging profitability:

1. Is the campaign contribution positive? Contribution profitable
2. Is the campaign contribution positive at a GM level? Contribution GM profitable
3. Is the campaign EBITDA positive? EBITDA profitable
4. Is the campaign EBITDA positive at a GM level? EBITDA GM profitable