The A to Z of marketing is designed to give you a flavour of the multitude of components that need to be considered when marketing a business.
This week we look at F=Financials.
It is essential that any business owner or marketing manager understands the key financial metrics of their business, otherwise how on earth do you go about starting to understand how much you are willing in invest in marketing in order to attract an enquiry?
In order to make the right decisions these are the basic figures you need to know….
- Average gross profit margin % (you will need an accurate grasp on your cost bases here)
- Average transaction values within the business
- Average number of transactions per customer per year
- Average number of years a client stays a customer
- Enquiry conversion rate
OK, obviously the more detail you have, the more accurately you can measure specific campaigns and specific products and services. However, bearing in mind most companies do not even track all of these elements, let alone know the figures, I am purely going to work on averages across the board.
The first four figures outlined above will enable you to start to calculate the average lifetime value of a client. This is a critical figure to know for anyone who is serious about marketing their business. If you don’t know this figure you are blindly stumbling in the dark.
This can be simply calculated by the following formula:
Avg Transaction Value X Avg Transactions Per year X Avg Number of Years X Avg Gross Profit margin = TOTAL LIFETIME CLIENT PROFIT VALUE
An even more accurate reflection can be calculated if you measure the average number of referrals a client makes over the course of the year. However for simplicity purposes I am not going to include that figure in this example.
So now you know what a client is worth to your business, you can start to calculate how much you are willing to spend to gain a new one. So if a client’s lifetime profit value is £500, are you willing to spend £100 on winning a new one? £200? £300? £400?
You see it all comes down to your business model and different people will see this differently. Only you can make this judgement.
When you have settled on a figure on how much you are willing to spend to win a new customer, you then need to consider your conversion rates.
If your conversion rate is only 4% – i.e you only convert 1 in 25 enquiries into the business and you are willing to spend £300 on winning a new customer then you know that a campaign that costs £1500 needs to generate 125 enquiries in order to secure 5 new clients.
Similarly you know that in order to break even on the campaign you need 75 enquiries generating 3 new clients.
Now I am not going to go into how you improve you conversion rates here because there are many different variable factors that contribute to this, such as the number of enquiries, quality of enquiries, price, sales process etc.
However, if you don’t start testing and measuring campaigns you will have no idea what works and what doesn’t work……and if you don’t have a good grasp of the financial metrics of your business then how do you know if your marketing spend is generating a positive return on investment?
The simple answer is you don’t!
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