CMO Guide: Finessing your financial model
In today’s quicksilver business environment, making intelligent marketing decisions is more critical than ever. But to truly excel in such a hypercompetitive, uber-saturated marketplace, you need both visibility and control over your company’s budget and finances.
Unfortunately, many marketers fail to consider the financials and financial planning. Whether by accident or on purpose, marketing teams wind up isolated from finance, HR, and operations. Such a disconnect leaves them with only a hazy understanding of COGs, OpEx, financial statements, cash flow statements, and other investments, leading to missed opportunities, misallocated resources, and unaligned organizational objectives.
To construct a lean, mean digital marketing agency or machine, marketers need to dive deep into the nitty-gritty of individual SKUs. This granular perspective equips them with a comprehensive understanding of the company’s financial models, empowering them to make strategic bets on pricing, promotions, and product assortment.
So, what’s the secret sauce to achieving this financial modeling mastery?
Read on to unlock the financial planning formula for supercharging your marketing initiatives and taking your success to new heights.
Define your customer economics
Do you know exactly how much it costs to acquire a new customer? Do you understand their lifetime value? What about their retention rate?
Financial KPIs like these are critical in shaping your strategic decisions for acquiring and retaining customers in a way that maximizes company profits. By analyzing these metrics, you can gain valuable insights into the effectiveness of your marketing and sales strategies and make data-driven decisions to optimize your customer acquisition and retention efforts.
When it comes to customer acquisition costs (CAC), marketers must tread a careful line. They need to determine the share of the margin they’re willing to sacrifice in order to justify acquiring a new customer.
This decision is intrinsically linked to the financial models, business model and typical buyback period. For instance, a one-off product may need to turn a profit after a single purchase, whereas a business operating on a recurring revenue model or financial models might require several return purchases to break even. Marketers must consider factors such as this to determine how much cash they’re willing to float between acquisition and buyback.
To optimize per-customer profit, consider these good financial model tips:
- Frequently monitor and optimize for blended CAC
- Center the marketing program around efficient customer growth
- Commit to conversion rate optimization
- Consider the buyback period and optimize for shorter cycles
- Develop loyalty or referral programs to reduce blended CAC
Maintain or build toward a healthy margin
Businesses with single-digit net profit margins face constant financial risk. There’s no margin for error or mistakes in their income statement or cash flow statement.
To make informed decisions that increase margins, marketing leaders first must dive into the financial statement numbers, taking the time to fully understand their brand’s gross, contribution, and net profit margins. Furthermore, businesses with low margins can’t afford to overspend or waste limited funds on experimental channels.
To that end, there are three financial modeling issues marketing teams must be wary of, all of which can eat away at margins:
- Discounts – Be careful with discounts, as they can significantly impact profits and a customer’s LTV. Before you ever provide a discount, double-check that the conversion rate increases justify any profit loss; otherwise, reconsider the discount strategy.
- Lifetime value loss – In challenging economic times, consumer purchasing behavior often shifts, especially for non-essential or luxury purchases. In response, brands must frequently update customer value models to reflect changes in repeat purchase rates. Failure to do so could result in inaccurate revenue forecasts, inefficient marketing spending and financial modeling, and missed opportunities to engage customers in more meaningful ways.
- Death by a thousand cuts – Collaborate closely with all internal teams that impact costs, margins, and profits, such as operations, procurement, logistics, and returns. Even if a small profit loss in one department seems insignificant in isolation, when aggregated, these losses can significantly harm the brand’s income statement and financial health.
Define a strong pricing model
Pricing is the most powerful profit protection tool in a company’s kit.
Mastering the art of pricing is essential for safeguarding profits and driving growth. And periodically reviewing and adjusting pricing models ensures maximum profitability per transaction while maintaining customer appeal.
Here, striking the right balance with your financial model is key. There’s an eventual tipping point where, if you price too high, you may turn off would-be buyers.
How do you find that equilibrium point?
By deploying the following price optimization strategies:
- Rigorously test product prices through the lens of maximizing profitability.
- Perform careful analysis of market and competitor research to discover pricing ranges.
- Perform consumer research to better understand the value of your product and what consumers would be willing to pay for it.
- Experiment with value propositions and product messaging rather than simply providing the lowest price option.
Keep an eye on inventory and product assortment
Marketing teams must be mindful of the cost burden associated with existing inventory, as well as the seasonality or shelf life of their products, particularly when certain items are highly seasonal.
For instance, promoting a line of shoes when winter jackets are nearing the end of their season can trigger a negative ripple effect. Although the shoes may have been sold profitably, you now face the challenge of storing bulky jackets for nine months or liquidating them at a loss.
This consideration is vital for all businesses but is especially crucial for those with a wide array of SKUs. By examining their current product assortment, stock levels, shipping timelines, and purchase orders, companies can prioritize the items that require urgent restocking. This proactive approach helps to maintain a healthy balance in inventory management and minimizes potential losses.
Want to minimize inventory risks? Take these steps:
- Partner with fulfillment specialists or co-packers with more efficient supply chains, warehousing and shipping logistics.
- Focus on negotiating shorter-term minimum order quantities (MOQs) with key suppliers and distributors so that you can resupply when cash flow is improved.
- If a product is sold via an online retailer, send activations to channels with direct fulfillment.
- Leverage a toolkit like Acenda to track the stock and age of products across multiple marketplaces.
- Highlight the highest margin products, especially in paid acquisition channels.
- Create a marketing calendar that centers on product seasonality.
How can your business drive profitable growth in 2023?
To learn more about finessing your financial model or financial statement or to delve into other subjects like how to recession-proof your marketing, maximize customer value or optimize operations, look no further than the CMO’s Guide for Igniting Growth and Profits in 2023. This essential resource can propel your brand’s marketing efforts forward.
Ready to elevate your marketing strategy to unprecedented levels?
Regardless of your specific requirements, size or budget, Power Digital Marketing is perfectly poised to be your trusted partner in growth. Contact us today for a complimentary marketing appraisal tailored to your needs.