A Quick Recap
In Part 1 of this series, I summarized a point I had made in past blog posts about there being different levels of ROI (Return On Investment). (Yes, I know some of you might debate the point that ROI is ONLY about determining financial returns. But, come on, the ROI discussion isn't unique to social media. The workplace learning and performance industry has been grappling with that question looong before social media was still a twinkle in our eyes. In fact, that other profession has already created workable models that are worth considering so as not to reinvent the wheel in the current social media ROI debate.)
Then, in Part 2, I posted a video to show the application of a breakeven analysis using Total Cost and Total Revenue concepts as one proxy for getting a handle on ROI. I used an example in the special case of a subscription-based social network.
In this third and final part of this series, I'll pick up where I left off at the end of part 2 by sharing the formula to determine your breakeven number of members in my case-scenario.
Keeping It Real
First things first. It's worth saying that we have to be careful that whenever someone presents something as a "formula," that we don't allow ourselves to fall into the trap of thinking that formula is a one-size-fits-all approach to all calculations about breakeven analysis or ROI. In fact, it's more likely the case that, for what I'm calling "Level 4 ROI" analysis (and perhaps even for Level 3), each scenario is going to require a custom data gathering and analysis approach. (Hint: That's one way to test the mettle of social media "consultants" when you interview them for your project.)
Okay, with that said, let's remember that when I left off in Part 2, I ended with the path that got us to this end state:
(If you're just jumping in, you really have to see Part 2 to catch up. Go ahead, I'll wait for ya. The video is short.)
... Okay, let me begin with the end in mind. I'll just give you the answer. Then, for the rest of y'as who want to know how I got there, you can read further. The short answer for determining that breakeven quantity is:
Where:
- x = number of members
- F = fixed cost
- P = price
- V = variable cost
Remember to put everything in the same units. Meaning, months with months or years with years. In the example I had in Part 2, I gave:
- Fixed cost: $15,000 for the year.
- Variable cost: $7 per member monthly. ($84 per member annually.)
- Subscription price: $20 per member monthly. ($240 annually.)
That is, about 96 members, each paying the equivalent of $240 a year (given my scenario) would be what's required to about pay off your fixed costs AND the variable costs associated with maintaining all those members.
Again, it's worth reiterating that this isn't a one-size-fits-all approach. Nor is it a "fire and forget" strategy. You'll still need to have the support of someone who can keep an eye on those metrics and refine as you go.
Okay, that's about it for now... For the rest of you who want to see the rationale behind that formula, read on.
The Math Behind It
1. Start with the premise that the Total Revenue calculation is based on (Price of subscription) x (Members). (i.e., P times x, or simply Px)2. Then figure that Total Cost = Fixed Cost + Variable Cost. Where Variable Cost = (the cost per member) x (number of members). Ready for this? That means in short hand: TC = F + Vx
3. Okay, then we say, hmmm.... we're looking for that part of the diagram I showed in Part 2 where both the Total Revenue line and the Total Cost line cross each other. Another way to say that is "where are they equal?" Conceptualy speaking: what happens if Total Revenue (TR) = Total Cost (TC)?
4. So we put the math to it....
a. TR = TC
b. meaning, Px = F + Vx
c. and then... Px - Vx = F
d. and then pulling out that "x".... x(P-V) = F
e. x = F / (P - V) <-- This is the formula I gave you at the beginning.
Remember:
P = Price
F = Fixed Cost
V = Variable Cost
x = # of Members
Whew! That bought back old memories of my old Algebra teacher Dr. Devore. That's all for now... I promise not to do that again any time soon.
