TOOLBOX: METRICS

Three Good Ways to See How Your Business Is Doing

by Marion Gropen

“You can’t manage it if you can’t measure it.” You’ll hear that in every business school. An analogy offers another way to express it: You don’t really know what’s happening in your business until you can put numbers to it, just as you don’t really know a word’s meaning until you can define it.

So, what metrics work for publishers? That depends on your business and your goals, but there are three that work well for most of us:

• contribution margin

• total overhead expenses

• rate of accuracy of your projections

Contribution Margin

Contribution margin is the profit, before you assign any overhead to it. In other words, you add up all revenue, and then you subtract your cost of goods sold (COGS), distribution expenses, marketing expenditures, and other directly related costs.

You can and should calculate contribution margin as you make a variety of decisions, including whether to acquire a particular book, whether to undertake a particular marketing campaign, and whether titles are performing as expected and as necessary.

When I assess a proposed title, I ask whether the projected contribution margin for it is better than the projected contribution margin for other manuscripts to which we could devote our resources. The goal is to pick the manuscripts that will give us the best overall results for our limited resources. (Of course, you may sometimes choose a manuscript for reasons other than the likely profit, but you can’t do that too often and stay afloat.)

When I assess a marketing campaign, I look at the sales it is likely to create and subtract the printing costs it will require, the royalties that it will mean we need to pay, the amount it will cost to sell those books to booksellers and/or readers, and the expense of the campaign itself. Then I evaluate whether any other use of that time and money will give us a better result.

How do you project the sales to be generated by a marketing push? First, evaluate the audience you’ll reach. How many people will see your message? Approximately how many of them fit the profile of your ideal reader? How many of your targeted readers will actually buy your book? In short:

Sales = Audience × % of Ideal Readers ×

% of Readers Who Buy

For example: If a magazine with a circulation of 100,000 ran an excerpt from your book, if 10 percent of its readers were in your target group, and if most of those readers would be reading about the book for the first time, your estimate might be:

Sales Estimate = 100,000 × 10% ×

1% = 100 copies

When I analyze annual results, I look at total contribution margin for the year. (If I’m working with a company that is big enough, I analyze results more often than once a year.) I also look at the total contribution margin over the life of the title for any books that have “retired” that year. And last, but never least, I compare initial projections for those titles to the end results, and try to understand what we did right, and where we erred.

Total Overhead Expenses

Overhead includes all operating expenses except the ones that are included in the contribution margin calculations. These are the things you need to keep the business going: rent, salaries, office supplies, utility expenses, depreciation of long-term assets like equipment, and so on and so forth.

Your expenses on overhead are crucial to the function of your operation (if they’re not, you shouldn’t be spending that money), but they’re not going to disappear if you do one more title or one fewer title, or if you do Title A instead of Title B.

Every month, or at least every quarter, you should examine your overhead in comparison to budgeted numbers, last year’s numbers, and the total contribution margin that’s available to cover it.

Every dollar you can trim from overhead has a direct impact on your bottom line. By contrast, if you add another dollar to your sales, it’s filtered through COGS, distribution expenses, and the marketing needed to bring it in, before it hits the bottom line. You’ll be lucky if 10 percent of an increase in sales makes it through.

This means that a dollar cut from your overhead has the power of $10 added to your sales, or more. That’s worth some attention. Unfortunately, inattention often causes overhead to creep up. It’s never the mission-critical, obviously urgent stuff. It’s boring, dull, and mundane, and therefore, very easy to ignore.

I like to measure:

• overhead as a percentage of sales

• overhead per title published

• overhead as a percentage of contribution margin

Rate of Accuracy of Your Projections

Accountants have often been accused of steering companies by looking in the rear-view mirror. But the techniques I’m discussing rely on projections of future results as much as on evaluations of the past ones. This means that it is critical to evaluate and improve your accuracy in making projections.

One important tool involves dividing the real result of a project by the estimate made before it was launched. Stating this as a percentage and collecting the figures by staff member makes it clear whether any staffers are wildly optimistic or overly conservative. These figures can be a valuable teaching tool.

You will, of course, hear editors protesting that their numbers are largely dependent on the execution of the marketing and sales staff, and marketing folks protesting that the production department or the art director didn’t execute their campaign as promised, or that a book went out of stock at a critical time, and on and on. And it’s true that each person’s results are dependent upon every other member of the team, and subject to luck, as well.

But it is also true that a consistent result indicates a problem. Maybe someone on the team actually is incompetent. And that incompetence may indeed throw everyone else’s projections off until the problem is fixed. It’s just as likely, though, that a consistent discrepancy indicates a disconnect between reality and the person doing the estimates.

Whatever the cause, looking at the accuracy of your projections is worth the time. It will let you see whether there’s an issue to find and fix, even in those cases where it doesn’t tell you what that issue is.

Charting Your Metrics

If you program your financial reports to produce numbers for contribution margin, overhead, and accuracy, and if you plug the numbers for each of them into the graphing function in Excel, you should see some very interesting trend lines over time. Most of us glaze over when presented with a page full of numbers. But a graph tells the story in a way we can absorb.

When you see something in the graph, then you can drill down into the numbers that produced it and uncover opportunities for improvement.

Numbers can’t run your business, but like the dials, bells, and lights in a car, they can give you a quick, clear measure of critical information. It’s important to know how fast your business is going, and whether you left your lights on. And just like the dashboard indicators, they’re not infallible, so you need to use your judgment, too.

Marion Gropen of Gropen Associates, Inc., has been in publishing for 18 years. For the past few, she has been offering publishers financial and management advice on a by-the-question basis. You’re invited to send comments and questions on this article or other topics to Marion.Gropen@GropenAssoc.com. For further information, visit GropenAssoc.com, or her blog (on that site).

The Metrics You Use Most

Which metrics do you use most often and most successfully? How do you use them, and what do they tell you?

I’m collecting information about your favorites for a future article in the Independent. Please share your experience via email with Marion.Gropen@GropenAssoc.com.