How’s your maths?
Does the very word have you cringing with bad memories from school? Well, sorry to spoil your day, but if you are going to use paid advertising like Google Adwords, exhibitions, print advertisements and so on, then it’s essential to understand the numbers.
I love figures, I’ve always been good at Maths although at 15 I didn’t appreciate what a good thing this is – I would much rather have been good at art or sport!
So when it comes to the maths part of marketing, I’m pretty comfortable with it – but from talking to my clients it’s clear I’m in the minority.
So let’s talk about maths and the basic figures you really need to know to make a success of your marketing.
First, the good news – we’re not talking about advanced calculus, geometry or statistics here. In fact, it’s mostly simple arithmetic.
Ready? Let’s get started.
How much does a customer spend?
This is not the same as your average order value. You will get some repeat business so you need to calculate the total spend per customer over a period of time.
Here’s a very basic way to calculate this:
For example, in my wedding ecommerce business, the average order value was around £40. About half (50%) of all customers placed a single order, 40% placed 2 orders and the remaining 10% 3 or more. This means the average number of orders per customer was:
(50 x 1) + (40 x 2) + (10 x 3) = 50 + 80 + 30 = 160 divide by 100 (because we are using percentages) to give an average number of orders per year of 1.6 per customer.
Now, being weddings, we didn’t get much repeat business so we only calculated Lifetime Value over a single year. So here’s the actual calculation:
Your business may be different – you could have customers who order regularly and who return year after year. So make sure you allow for this is your calculation.
How much of that is profit?
Of course, for every order you only get to keep a proportion. So now you need to subtract your costs to find the profit per customer or their Lifetime Value.
You will have the cost of fulfilling the order (stock purchase, postage, payment processing) and every order needs to make a contribution towards your fixed costs (rent, staff, utilities etc). However, at this stage, don’t include your marketing costs.
Remember to take off the tax if you are VAT registered.
In our example, let’s say the average variable costs are £20 and the fixed costs £8
So you are left with the actual Customer Value. And you are now in a position to answer the final question.
How much are you willing to spend to get that customer?
Only you can answer this but in order to make a profit, you must spend less than your customer lifetime value. Preferably quite a bit less! In our example, we might consider £8 a reasonable target.
This is our target acquisition cost. And this figure is extremely useful when it comes to making decisions about marketing spend. Here’s just a couple of examples.
Using your Target Acquisition Figure
Use your target acquisition figure and your conversion rate to calculate the desired cost per click you are willing to bid.
In our example, if the conversion rate is 2% then you need 50 clicks to gain a customer so you can spend 16p per click. (£8 divided by 50).
If you are doing a trade show, craft fair, wedding fair or other event, then this figure can tell you how many customers you need to get to recoup your investment.
Let’s say you’re web developer attending a local business show. The cost of the stand is £500 and your target acquisition cost is £100. You would need to gain 5 new customers to make a profit from the event.
Compare this to the organisers predicted attendance figures (allow for a degree of optimism) and judge whether this is realistic or not.
There. I hope that didn’t hurt too much – it’s certainly less painful than losing hundreds of pounds on ineffective marketing because you didn’t do your sums first.