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Ask the Hard Questions: How do you make money?

Posted: September 26, 2005

How do you make money seems like a very personal question. However, it’s a very necessary question for any marketer to ask. How can one doing marketing for someone if they don’t fully understand the entire business model?

I was talking to a potential advertiser today, and the website seemed like it had a half dozen ways it could be making money, but I was sure that behind the scenes there was only one of two different actual conversions going on. So, I bluntly asked ‘How do you make money?’ Of course, I could hear people cringe.

Its one subject many people consider personal and would rather leave the sensitive conversation to after the deal was closed. However, the site owner quickly responded that he sold ad inventory on his site. The conversation then turned into a barrage of numbers.

"What’s your average sale?"

"$500"

"Next step, what’s your conversion rate?"

"Let me check, 7%."

I was impressed, not many people can give me their conversion rate in under 30 seconds. "That’s pretty good. What are you considering a conversion?"

"Someone filling out our lead form."

So a conversion isn’t money yet. So then the next question becomes, "what percentage of your leads turn into sales?"

"25% exactly last month."

Even more impressed that number came without evening having to look anything up. "What’s your CPA [cost per acquisition]?"

"$30, although I wouldn’t mind paying more if we could get more total conversions."

"Let me double check my math. At present it’s costing you $120 per sale. A sale is worth $500, so net of $380 per sale at present." I thought for a moment, "What is the absolute most you’ll pay per sale?"

"$200, I have to pay my sales people and keep some profit."

"What is your monthly budget?"

"I don’t have one. Under $200 per sale and I have unlimited budget."

I’ve heard that many times before. I think he sensed my hesitation about that as he quickly followed, "Our current budgets with Overture and Google total around $50k a month. That’s not an issue at all. Since we’re being paid on sales immediately, we can roll those dollars directly back into the accounts. I really do mean unlimited funds per month"

That brief exchange is now over, and I have enough grasp on their model and PPC to go into their account and have a look around before finalizing any proposals. They trust me enough to give me these numbers, which is important.
They trust me with their marketing, and at some point a trust factor is necessary for any ongoing relationship.

The brief exchange also means I have these numbers as a benchmark:

Max CPC: $3.50 (account wide) ($200 (CPA) * 0.25 (sales call closing %) * 0.07 (website conversion rate))
Sales conversion rate: 1.75% (0.07 * 0.25)
Max CPA: $200

It’s always enjoyable to talk to someone who just ‘gets it’. One of those people you think after a few more conversations that you can develop a great relationship; but that has yet to be seen. They know you’re being paid per hour. You know how they’re getting paid. The money is on the table - everyone understands how everyone else is making money. The money questions aren’t just out of the way, they’re a segue into many more conversations about CPC, conversion rates, split testing, etc. Things that you both have a clear understanding how they work - because you both now understand the numbers.

Don’t be afraid to talk dollars. You both are getting paid. You’re both making money. Figure out how. Let the numbers tell their own story.

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