Lots of talk about the gross money coming in. But it seems to skim over the fact that there's a real product being exchanged. Records being sold at $3 seems like a bargain, but what was the cost of these records to begin with?
Sure you made $10,000 in sales, but that's not $10,000 profit, and definitely not a ROI of 2000-3000%.
It's true, this was a liquidation sale, but most of the records came from a batch of 8000 records that I bought for $2000.
I was being a bit flippant with the ROI percentage, sorry about that - just trying to stress how easy the process was - I really was blown away when I kept asking people how they found out about the event, and they said they saw an ad for it on Facebook.
One thing to keep in mind, as far as calculating ROI, is that if I were to continue to run the business, these are all new customers that I could continue to sell to, so the return on investment isn't purely a one-time thing - the LTV of each customer is way more than they spend in one day.
A quick scan on ebay shows that you were charging less than the buy-it-now prices.
One other difference is that you were advertising for an event on facebook (as opposed to an external site). Do you pay per click to the facebook page or pay per action (attend or won't attend)?
Great question. On Facebook you pay per click or "per mille" (CPM) - it'd be great if they added "attend" as an event parameter in the Ads API so that advertisers could optimize their ads for event attendance:
$150 in ads = 150,000 people who accepted invitation or 150,000 people who clicked to view the ad? if it's accepting an invitation, that's a STEAL. Although not 100% of ppl will actually go, it'll be a huge %. You're basically paying for a stronger intent than simply casual interest.
The ROI on the choice to use Facebook is the cost of selling $10k of records by non-Facebook means minus the cost of Facebook ads ($150). That's easily several hundred percent.
Profit = Selling Price - Cost of Goods Sold.
Cost of Goods Sold = original price of goods + marketing costs + labor cost + facilities costs.
This isn't the precise formula, but it's close enough. It's still a good ROI, but it's definitely not scalable as this was a liquidation. You also have to calculate the tax rate on the sales as well.
If you're grossing $10,000 and you spent $2000 on records, 8 hours of labor (paying yourself $15 per hour) + the cost of the facilities (let's say $100 for the day) and $150 on marketing.
You'll still pay sales tax on the full $10,000. Let's say your sales tax rate is 8%, that means $800 in sales taxes. So now, you're at $9200, so now we can subtract your costs, which, according to my hypothetical approximations total $2370. If you want to exclude your labor cost, you can do that, but it'll still be taxes one way or another, depending on how you claim it.
So your profit is $9200-$2370 which is $6830. For a short term capital gain (which is what this is,) the rate is approximately 25% for Federal, however you also have state capital gains taxes (it's either taxed as ordinary income or as a capital gain,) which will be about 7% (depending on the state), but that 7% is taken off the total gain of $6830. (25% + 7%) of $6830 = $4645.
From the $15 per hour you get paid from your wages, you'll then get to pay social security, self-employment and medicare taxes on top of the federal income taxes. You can avoid this by not paying the salary, but you can't work for free in the eyes of the IRS.. you'll either pay the tax on the wages, or the total gets added to the profit and taxed as a capital gain. Of course, you'll get a slight home "office" deduction for using your backyard as a facility, of course that gets offset by the facilities fee you've earned (and will be taxes on.) It's cheaper though, to charge yourself the facilities fee because that comes off the capital gain, which lowers the taxes on the gain, while only nominally increasing your personal tax (due to deductions.)
Let's just round the total profit at $4600.
So, $150 in Facebook ads to earn $4600.. still a pretty nice ROI, but it certainly isn't $10,000.
We all know the seller isn't going to go to this extreme in either paying or reporting this income to all the jurisdictions involved, but when calculating ROI or other things upon which a business is based, it's a little disingenuous to claim "making" $10,000 when in fact, that number is far less. But I get it, $10,000 makes for a nice headline.
Great post; I love seeing actual numbers being put to the test on HN.
Something that doesn't sit well with me: how sustainable is this business model? How often can you find crates of records for $2,000 that sell for $10,000? How much time does it take you to locate those crates? How long before your folks get mad about their lawn being trampled during these sales, and the neighbours get miffed having 300-odd people clogging up the streets? What are your opportunity costs?
In short, while this article clearly proves that Facebook ads are viable as profitable sources of lead generation, since this seems like such an occasional-hit scenario I'm still not totally sold on whether they are as suitable for sustainable long-term enterprise (I'm extremely curious as to how many people will attend a 2nd event? 3rd?).
This is particularly relevant if you're wondering what Facebook's long-term revenue growth will look like (how much of their present revenue can be attributed to businesses trying Facebook out? How many of these businesses will find repeat business with Facebook to be profitable?)
Cost of Goods Sold = original price of goods + marketing costs + labor cost + facilities costs.
Its nitpicky but this isn't how you calculate COGS. Marketing and Facilities don't count in COGS and labor costs are only the costs of producing the product which in this case isn't anything.
Sure you made $10,000 in sales, but that's not $10,000 profit, and definitely not a ROI of 2000-3000%.