When people ask me at networking events what I do I always say ‘I help people understand their business numbers better’. That usually gets a response like ‘well I need that!’ Its way better than I am an accountant, and after all they asked what I do, not what I am.
And one of the things I go on about relentlessly is ‘know your business numbers.’ Because numbers are the language of business and it is numbers that will ultimately determine your success. Business is literally a numbers game.
But what numbers should you know?
To start there are seven key numbers that you should know and can measure to drive your marketing strategy.:
1. The lifetime value of each customer often called customer lifetime value (CLV) is the amount a customer is worth to you over the period they are a customer. If your average customer spends £200 per purchase, buys four times a year and stays with your business for five years, the customer’s lifetime value to your business is £4,000. So you have a £4,000 customer, not one worth £200, the amount of each purchase. You can now calculate the worth of each customer and adjust your marketing accordingly to drive more of your high lifetime value customers.
2. How much it costs to acquire a new customer. I call this your cost per acquisition (CPA) and it can help determine how much you spend on any marketing or advertising campaign.
Let’s say you’ve placed an ad in your local paper for £400. You get 20 responses and 10 sales. The acquisition cost for each customer is £40 (£400/10 = £40). If your offer results in at least £40 in profits on every sale, you’ve run a successful campaign. But if your CPA is £40 and you have little or no profit, or are acquiring customers at a loss, is it time to reappraise your marketing strategy? It may be, but remember CLV. If that customer goes on to be an ‘average’ customer worth £4,000 that may be a very successful ad.
3. Conversion rates. Your conversion rate is the proportion of prospects that turn into customers. Let’s say you offer a voucher for a free bottle of wine with a meal at your restaurant. The campaign generates 1000 leads over a two-week period, and 200 of those leads buy. Your conversion rate is 20 percent (1000 leads/200 new customers = 20 percent conversion rate).Too low? Tweak your sales process, narrow your target or create a better offer. Knowing where you are is half the battle in getting to where you need to be. Go back to 2. What was the conversion rate from the ad in the local paper?
4. Your average sales value. The value of each sale is important if you are looking to generate repeat business, improve your margin or up-sell. A takeaway owner decided to offer a free litre bottle of coke on all orders over £25. He did a deal with his local cash and carry to buy the coke cheaply and not only did his average sales value increase he got customers from his competitors. All because he knew his average sales value was just under £20 and so the extra spend would more than cover the cost of the give-away. Simple add-ons can add sales value as well. ‘Would you like fries with that?’ for example.
5. Response rates. Direct mail response rates will vary from 1% generated by using lists from a list broker up to 5 percent generated by using your own list of current or past customers. So to get 50 responses to a direct mailing, you’ll need to mail to a minimum of 5000 names with a great offer. Online e-mail response rates are generally around 0.1%. To get 50 responses from an email campaign, you’ll need at least 50,000 names, knowing not every response will end in a sale.
6. Lead-to-sale-ratio. If you’re in a business-to-business, professional services category or have a long-term sales cycle, your lead-to-sale ratio will give you an idea of the audience you’ll need to target to actually close a sale. Say your startup sign making business needs 10 prospects to generate five meetings to produce one client. To get 1000 customers, you’ll need to prospect 10,000 people.
7. Touches to sale. How many contacts or touches does your prospect need before they buy? It’s generally accepted that, on average, you need at least seven to ten touches for a sale. Most people give up long before this. So when should you stop touching? The answer is when you are asked as you never know when the timing is finally right for a sale. Hence the saying ‘the fortune is in the follow-up.’
Knowing your business numbers and what numbers to know in the first place greatly improves your decision making, marketing strategy and helps you better predict how to allocate your marketing spend. If you do your numbers and discover you need a 10,000 person database to get 1000 customers, your marketing plan is pretty simple: Get a list and an offer, then track and convert your results.