How to Maximize EBITDA This Holiday Season
Experts are expecting a ‘downbeat’ holiday season for retail. Here’s how to maximize EBITDA — despite external factors.
Americans spend almost a trillion dollars each holiday season. Total holiday sales in the U.S. have increased yearly over the past decade, according to National Retail Federation data, but there’s pessimism in 2023.
The fourth quarter traditionally represents a disproportionate amount of total retail sales in the U.S., but many retailers are preparing for a “downbeat” holiday season this time around. A recent Mastercard survey forecasts a 3.7% increase in U.S. retail sales this holiday season (from Nov. 1 to Dec. 24), but other research indicates that consumers will be more “price-conscious,” shopping more online and seeking out value and deals.
What does this mean for private equity firms with portfolio companies that rely heavily on holiday sales?
It means you should focus on what you can control this holiday season. Acknowledge and be aware of external factors (such as the economy, survey data from consumers, etc.), but hone your marketing efforts to ensure your businesses maximize EBITDA in November and December. Here’s a look at how you can do that.
The Power of Connecting Digital Marketing to EBITDA
In a “downbeat” holiday season when businesses expect fewer opportunities, retailers must maximize the opportunities they do have. Increasing clickthroughs and converting a greater percentage of visitors are just two of many ways to maximize opportunities.
But, because most businesses use dated financial models, they don’t fully comprehend the downstream impact that even modest improvements in clickthrough and conversion rates can make on EBITDA and the other financials that private equity firms care about most.
We recently published a white paper that explains how connecting digital marketing levers to EBITDA helps private equity firms maximize their returns. You can get all the details by downloading it here, but check out this 5-point summary of what the white paper shares:
Marketing plans and the outputs investors expect exist separately — and there’s traditionally no translator to connect them.
Current models are incredibly limited in how they make growth assumptions and project EBITDA and enterprise value.
Adding a layer that includes marketing tactics is a superior way to project EBITDA and enterprise value.
When you add this tactical layer, a single toggle at the tactical level flows directly to enterprise value.
There are clear steps private equity firms can take to add this tactical layer to their models.
We outline those steps in the white paper. When you follow the steps to add a tactical layer to your financial models, toggling at the tactical level immediately shows how improving your conversion rate influences revenue, cost of goods sold, and EBITDA.
In the next section, we share a brief summary of how it works in practice.
Example: $5K in Creative Testing Boosts EBITDA By 43%
Imagine your private equity firm has invested in a company that sells equipment for camping and other outdoor activities. Facebook traditionally drives the greatest percentage of purchases. Average Facebook performance across the first 10 months of the year looks something like this:
Facebook spend: $50,000
Cost per mille (or cost per thousand impressions): $20
Impressions: 2,500,000
Clickthrough rate: 4%
Visitors: 100,000
Cost per visitor: $0.50
Purchase conversion rate: 3%
Purchases: 3,000
Average order value: $100
Site Revenue: $300,000
ROAS: 6
Gross profit margin: 70%
Gross profit: $210,000
Fixed costs/overhead: $100,000
EBITDA: $110,000
Now, imagine your digital marketing team invests $5,000 to design and test new Facebook advertising creative for the holiday season — ads to run starting Nov. 1 through the end of December. The testing results in new creative that boosts the clickthrough rate from 4% to 5%, an increase of just 1%.
When you add a tactical layer to your financial model, simply toggling that one figure from 4% to 5% immediately shows the downstream impact on EBITDA. With just the clickthrough rate input adjusted from 4% to 5%, and adding the $5,000 in design and testing costs to fixed costs, you can see the dramatic impact on the bottom line:
Facebook spend: $50,000
Cost per mille: $20
Impressions: 2,500,000
Clickthrough rate: 5%
Visitors: 125,000
Cost per visitor: $0.40
Purchase conversion rate: 3%
Purchases: 3,750
Average order value: $100
Site Revenue: $375,000
ROAS: 7.5
Gross profit margin: 70%
Gross profit: $262,500
Fixed costs/overhead: $105,000
EBITDA: $157,500
The $5,000 invested in designing and testing new creative generates a 1% increase in conversion rate — which yields a $47,500 increase in EBITDA. That’s a 43.2% improvement over previous months. And remember that the clickthrough rate is not the only digital marketing lever available to you. You can also improve the purchase conversion rate by testing on-site adjustments, and you can increase average order value by offering discount bundles.
How these digital marketing levers interact with one another can get complex, but we walk step-by-step through the entire process in our latest white paper, “The Ultimate Input.” Download it here, and get in touch with the Aux Insights team for support in maximizing EBITDA across your private equity firm’s portfolio companies.
You can’t change the external factors that will influence holiday retail sales this year. But you can control your digital marketing levers for positive impacts on EBITDA.
