Internet Sensitivity

Sensitivity Model Directions

 The Sensitivity Model is a valuable tool to analyze the total impact of various marketing efforts. On one hand, it allows you to evaluate and compare various strategies. On the other hand, it allows you to change parameters and assumptions and see the dynamic results. Specifically, it allows users to vary price, units, costs, and success to compare outcomes.

Don’t worry if you are uncomfortable developing some of the parameters. It at least forces you to establish assumptions. This is a process, and is expected to be revised as you see real results. However, this becomes a start to developing real data to change the parameters and maximize your efforts and forecasts.

• Spending is a dollar budget estimate for category of marketing. This is the key variable that drives the model. How much are you considering to budget on different marketing programs? Remember: some, like paid search, only occur if you get a lead. Others, like SEO (organic search) and social media (Facebook, Google+, etc.), are generally fixed expenses that may be lower, but have no assurance of effectiveness.
• Cost is net cost, including handling and shipping. You also must understand fixed and variable components. For example, selling unused time for service or obsolete goods really has lower real costs.
• Depending on the model, the selling price is the wholesale or retail net price. That must include allowances for shipping, returns, and distribution charges.
• Clicks are spending (cost) per click. Again, for fixed expenses, you must estimate and then verify after execution. However, this exercise at least encourages you to develop expectations and plans, rather than rely on frequently unprofessional sales pitches.
• Cost per click is the average estimated cost to obtain a click. That, combined with gross profit, conversions, and price, is the key factor affecting profitability. Note: you cannot spend $40 to $60 for a conversion that only provides $20 to $30 in gross margin in the long term.
• Units are units sold (or conversion rate) multiplied by clicks. They also allow you to analyze the differences in revenues and profit with different prices.
• Sales are units sold multiplied by the selling price.
• Gross margin is total sales, less units sold, multiplied by the cost. This is a critical variable in determining both how much you can spend and its impact.
• Variable marketing is internet marketing or commissions or other variable costs.
• Marketing is the other marketing costs, like brand building, public relations, etc. The estimated percentage is at the top, or can be input to each subset.
• Administrative is customer service, rent, insurance, accounting, etc. Percentage is at the top, or can be input for each subset.
• Profit is gross margin less fixed marketing and variable marketing, and then less administrative. One notes that total profit is more important than percentage in evaluating most direct marketing campaigns. This exercise should encourage you to move efforts to those that are most profitable.