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Shooting a testimonial
By Jim McNamara
I’m no accountant,
I don't have a crystal ball, and you should
have a qualified financial advisor look
over any business plans or profit projections
thoroughly.
But, with those cautions
in mind, our
Calculator
Page should help you understand the
financial side of DRTV.
4 Sections
The Calculator has 4 basic
parts:
-
A Summary for one & 6 months
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A Net Profit Per Unit calculation
-
Detail of 6 month's cash flow
-
Detail of the first month's flow
Why 6 months instead of
a year? Because DRTV moves so fast.
Make it through the first 6 months and the
next 6 will be a lot easier...and more profitable.
You can easily extend out the projections
if you wish.
Measurability
In DRTV, everything we do,
every ad we create and every time period
we buy, can be measured. That’s one of the
great things about DRTV—you can tell immediately
whether your ads are working.
With traditional, “image”
commercials, you can hardly ever do this,
because nobody calls you.
But in DRTV, we get people
to respond now, immediately. And we put
a unique phone number on each different
commercial that runs, which allows us to
count up the number of orders that come
from a particular ad’s running. Multiple
the number of orders times the price, and—presto!—you
now know how much revenue you derived from
that spot.
The Ratio
cell c6
In the stock market, you
can judge the strength of a stock by looking
at its P/E ratio. With that one number,
you know instantly how a certain company
is performing.
Well, in DRTV, we have something
similar. We just call it
The Ratio.
You simply count up the
amount of sales generated, and divide it
by the cost of the media it took to create
those sales.
If you bought a time period
for $500, say, and it generated about $1500
worth of orders, you’d say “my show did
a 3.0” in that particular time slot. Or
you might say, “my show is doing a 3-to-1”.
In DRTV, the ratio can tell
you a wealth of information. You can figure
the ratio for an individual time period,
or an evening, or a day, or a whole week’s
worth of sales. You can calculate a ratio
on a particular DMA or marketing area, or
on the whole country. You can figure a ratio
for Show A versus Show B. Or you can chart
your show’s ratio as it climbs and falls
as the effectiveness of your show changes
through the year.
Going back to your high
school math, here’s one interesting way
to think of a ratio: if your show is doing
a 4.5, that means it is generating $4.50
for every dollar you spend on media.
The higher the ratio, the
stronger the show. In my experience, I’ve
seen shows perform at ratios of everything
from a –0.5 (a real dog), to a 14.0 (which
is like a license to print money).
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Break Even Point
Usually,
it is a ratio of 1.75 to 2.0, depending
on your particular product costs.
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As you run a new show more
and more, you get a feeling for its “normal”
sales performance ought to be. Over time,
your show might average a 2.5 or a 3.1.
That’s important information, because you
can judge the effectiveness of a particular
time period, or the price of an un-bought
slot of airtime, by comparing it to your
historical, normal ratio.
Media Drives Everything
ROW 20
The thing that drives the
DRTV business is media spending. That’s
why you see it as the first line of these
projections.
It’s like a locomotive—when
you have a show that has been proven to
return, say, a 2.5-to-1, you know that the
more money you spend on media time, the
more sales you’ll garner.
With a ratio like that,
you might rush to buy as much media time
as you could, maybe $150,000 a week, to
make as many sales as fast as you can.
That’s why good media buyers
are some of the most sought-after talents
in the industry.
Profit Per
Unit
cell g16
This is the core of the
spreadsheet, showing you costs and revenues
per unit, with an eye toward making better
decisions.
I think I’ve included every
relevant cost you’ll have. You can adjust
my figures by inserting correct costs here.
When you make and use this
estimate, you should use long-term costs,
not current or short-run costs, because
you are making decisions for the long run
here.
Cost of Goods Sold
cell e9
The economic realities of
DRTV usually require a 4:1 or better ratio
between cost and price.
Upsells Not
Included
cell e6
To simplify things, I have
not included revenues or costs from any
upsells. These can add significantly to
your profits, since they are yours with
no media cost.
Remember that you can change
upsells rather easily and test different
ones until you find one that really works.
About 30-50% of callers should buy a good
upsell.
Price
Cell: H4
Input your price here. If
it's less than $40, you're probably looking
at a short form DRTV spot. More than that,
most likely you'll want an infomercial.
Shipping & Handling
Cell: H5
$7.95 on up is typical these
days. It is perfectly normal to make a profit
on shipping.
800 Number Service
cell h12
Called "inbound telemarketing",
it is usually 2 to 5% plus start-up costs.
Credit Card Merchant
Account
cell h10
If you've never accepted
credit cards before, the bank may insist
on holding a significant percentage of your
receipts as a hedge against returns.
Fulfillment
cell h11
Usually about $2 to $3 an
order.
Returns & Bad Debt
cell h13
This can be higher if your
product doesn't live up to its promise.
Royalties
cell h14
These are normally paid
to your writer-producer and any celebrity
talent and can go as high as 10-15/%. They
are almost always figured on gross sales
without shipping & handling.
Maximum Media Cost
Allowed
cell h8
Related to the Ratio, this
amount tells you the most you are willing
to spend on media to close a sale. It is
generally 30-60%.
The cost of media time is
always the single biggest cost in DRTV.
In a sense, it is like the wholesale discount
that a retailer would take for selling your
product.
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How Much Should I
Budget For Media?
cell h8
That question makes sense
if you're doing traditional advertising.
But not in DRTV.
Here's why: unlike
in traditional advertising, you don’t really
want to set a limit to your spending in
DRTV.
Remember, if you have a
show proven to do a 2-to-1 or better, you’re
making a profit—sometimes a lot of profit—every
time it runs.
That being the case, theoretically
there would be no limit to the amount you’d
spend on such a show. But in reality, there
is.
You see, as your media buyer
buys more and more time, she quickly runs
out of “bargain” time periods to buy. To
spend more and more money, she is forced
to choose less and less desirable (read:
more expensive) time periods. As she does
that, your average performance ratio climbs.
When that number hits the ceiling of what
you're willing to pay for a sale, you've
reached your media limit.
As a practical matter, it
is possible to spend $600,000 to $1 million
on media per month on a hit.
And media's percentage of
sales should fall between 30-60%.
On this spreadsheet, fill
in your desired percentage of sales and
the calculations will be automatic.
Looking at 6 months…
b18 ONWARD
This chart shows you the
net profit for six different hypothetical
months, each with a media budget that is
higher than the last. It takes those itemized
costs that we see above in the Net Profit
section and extends them out under the effect
of various media budgets.
6 months should be long
enough to not only test your show, but start
rolling it out into all the different markets
as well.
How Much Does It Cost to Test My Show?
cell c20
In DRTV, you watch your
sales results and media spending every day.
So theoretically, you never stop testing,
whether it's a new time period, a new station,
a new bonus offer, or whatever.
From a practical standpoint,
you should be able to get a good idea of
a new show's strength with $10,000 to $25,000.
Roll Out
cell d20 ONWARD
Our media budgets here start
in this case at $25K, which is about the
minimum per month entry level spending,
and works up to $200,000, which would be
a pretty good month.
It increases each month
at roughly the same rate that you might
want to do with your show.
In DRTV, you start spending small on a new
show, and then gradually increase it as
you become more confident that it will produce
for you.
Additionally, remember that
you don’t have to increase your media buying
beyond what you can afford. It’s perfectly
OK to spend at the lower levels if that
is what you can afford.
Other Unit Costs
cell c24
As you can see, we’ve itemized
the two biggest costs: media and cost-of-goods.
Most of the other costs (telemarketing,
shipping, returns, etc.) are comparatively
minor so we’ve lumped them into a line entitled,
“Other unit costs”.
TV Production
The cost of producing your
show, as well as any R&D or product design
costs, are not included here. Those are
long-term, sunk costs that you don’t take
into consideration here. You’ll probably
amortize those costs over your whole campaign.
Changes to TV Spot
cell c25
It’s very normal for marketers
to test a new commercial on the air, then
pull it off for re-editing or other changes,
then put it back on the air.
Some of the most successful
infomercials have gone through this “tweaking”
process 6 times or even more. We’ve allocated
money for such changes, even though we currently
don’t think we’ll have to make them.
Total Investment Needed
ROW 31
On this line, you see the
total investment (not the incremental investment)
needed to sustain the different months and
levels of spending.
Remember that media and
virtually all other vendors in DRTV will
need to be paid in advance. They don’t offer
credit terms, often because they’ve been
burned before by so many DR fly-by-nighters.
ROI
CELL B9
And there’s the good news,
if I’ve done this right. If you take the
profits and the holdback, and divide them
by the investment required, I believe we
are looking at a healthy return in this
6-month period.
“Actual Mileage May Vary.”
Bear in mind, all of this
hinges on that relationship of sales to
media (regardless of whether that is expressed
as The Ratio or as media's % of sales, as
it is here).
Right now, you're only guessing
at what it might be, but once you start
actually running your spot, we’ll know.
The actual ratio may be higher (which would
be outstanding), or lower (in which case,
you'll start thinking about revisions to
the spot.)
Minimizing Risk
Now, remember this is a
schedule for a progressive, one-step-at-a-time
roll-out of a commercial. And it’s a commercial
whose results are quickly measurable.
If you, as the marketer,
don’t like the return you’re seeing at any
time, you can stop the media buying with
just 2-week’s notice, or suspend it for
a few weeks while you make editing changes
to your commercial.
You can protect yourself
in case your show or your media buy doesn’t
perform as planned. Thus, your capital at
risk is actually far less than the investment
needed shows.
Spending Less
It’s also possible to spend
less than I’ve projected here. You can max
out your spending at any level. After a
successful test, you may also find it is
easier to find additional sources of capital.
Looking
at 1 Month
CELL B36 ON
Here you see the individual
weeks’ detail from that Month #1 from above.
On and Off Weeks
CELL D38
Note that we’ve planned
to be on the air one week, off the next,
and so on. This is commonly done at first
with a new show, because it allows you some
time off between runs so that you can analyze
your results and tweak your show.
Small Production Run
CELL C40
Week #1 carries the cost
of a small production run that will be used
to fill orders during the first month.
Total Investment
Needed – 1 Month
ROW 51
This row is different than
the 6-month version. Here we estimate the
amounts you need to invest each week as
you progress through the first month of
DRTV sales.
Good luck!
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Jim McNamara
is president of McNamara & Associates,
an LA-based company that writes
and produces infomercials and DRTV
spots. Over the last 25 years, his
ads have sold more than $1 billion
worth of products and services for
clients like ThighMaster, Jenny
Craig, Dean Martin, MindPower, and
more. Reach him at (818) 907-6212
or Jim@mcdrtv.com.
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