Can you do the sums? I’ve got bad news for you. Business and running a business involves Mathematics.
Hands up who doesn’t like maths? By the way, I’m not putting my hand up because I like doing maths (Maths is what we call it in England, math for North America).
But there are a number of key metrics you’ll need to know to run your business. Without them, you’re flying blind. Things such as click-through rates, conversion rates, lifetime value, profit margins, simple stuff like that.
Let me give you an example of why you need it. Take the lifetime value (or the annual value) of a customer. If you don’t know that figure, how can you know how much can you spend to market to them and still make a profit?
We promote many things in marketing that are free but a lot of it has to cost money. Google AdWords, Facebook ads, basic advertising, there are some that you still need to do and, if you use them correctly, if you know your key metrics, they are very, very effective.
Say for example, you have a product or a service that you sell for $150. That product costs you $100 to make or to create. Therefore, you have a profit margin of a third, 33.333%.
That is not the same as a mark-up. Mark-up would be different. In actual fact, in that example, it would be 50%, so you’re making $50 on that initial sale. Now, if you know your metrics, you may know that the average customer will buy three times over a 12-month period after their initial sale, so, once every four months.
On average, they’ll spend $90 and of course, you’re making a third so, you’re making $30 every transaction.
Let’s work it out.
You’ve got that first sale where you made $50, in each set of four months following, that’s three of them, at $30 profit per sale equals $90.
So, over a 12-month period, you make $140 from that customer. Now, you can work out how much you can spend to acquire the customer and this is how all the big companies do their sums.
This is why they spend a lot on advertising to get them in because for a lot of organizations know that, once they’ve got the customer, the customer is not going to go anywhere else.
That’s because they’re going to be nice, they’re going to treat them well, to keep them and they probably know the lifetime value of their customers over a four or five-year period, possibly longer depending on what they offer.
It’s your job to keep your customers.
If it’s longer than a year, technically, you could spend $140 to acquire that customer without losing any money. How about spending $50 to get that initial sale knowing you’re going to get three more orders from them over the year?
That’s why you need to know your sums.
Book For The Week
Now, being a Monday, I recommend a book. The good read for this week is Exceptional Service, Exceptional Profit. Basically, it talks about customer service. It is a great book.
It is like a bible of customer service. It is based on a lot of what is done in some of the hotel trades, such as Ritz-Carlton. It’s fabulous – it has insights in there I never knew and we apply quite a bit of it to my business.
And I thought we already gave exceptional service.
So, hop on Amazon, go to your favorite bookseller and grab a copy. You won’t regret it.
Something else you won’t regret is having a look at our podcast’s sponsor, Rainmaker. Rainmaker is a WordPress platform but it hosts and creates your website with templates, everything you need to know including the full training on how to market a business online.
We use it at Marketing For Owners. We won’t use anything else.
Enough said, I’ll see you tomorrow.