Theory of Buying Customers
Know Your Numbers – Part 2
Theory of Buying Customers
Today we’re going to talk about part 2 of knowing your numbers – how much money can you spend on advertising and marketing to grow your business. Last time we talked about calculating the value of a customer – their current sale, and their potential going forward. But that’s not going to mean a lot if you spent too much to acquire that customer.
Some people don’t want to spend any money on marketing or growth. They don’t want to buy customers. Either because they don’t have the money for it or they don’t appear to have the money for it. However, if you do the math then you do. And in fact, can make more money. Marketing budgets are often the last to be considered.
Businesses have the money for buying new equipment or supplies but don’t have the money to invest in marketing because they don’t know if it’s worth it. Or they hear stories of other people who’ve gone to events, that cost them money to go, and they didn’t get much out of it.
On the other side though, are people who are constantly throwing money at their marketing, but not paying attention to the numbers and then crashing and burning.
The theory of buying customers is thinking of them in terms of cost of acquisition. For example, if you go to a marketing event, fair, or show, you have a fixed cost. How much did it cost to rent a table? How much was your time in getting ready for the show and participating in it? And how many customers did you get, how much money did you make? This is the simplest math.
But how do you know if these events are going to be worth the time? Which is the hardest part about spending money, and time, trying to get new customers. A lot of people don’t even realize they’re marketing when they’re driving around handing out business cards because it’s not costing them any tangible money. So they don’t keep track of the time or the business that resulted from it.
Let’s get into some of the math.
What’s the cost of you hopping in the car, with a truck full of samples, some business cards and maybe a couple of brochures, and going and knocking on some doors? You’re going to want to calculate in gas, your labor cost (which is really important, because if you ever want to hire someone else to do this, you need to know how much it’s going to cost), hard goods (business cards, brochures), and any samples you give away.
Gas = $50
Your labor = $20/hr x 7 hours = $140
Hard Goods = $10
Samples = $50
Total = $250
You may have thought that throwing a couple things in the back of your car and driving around for the day was free. But the reality is it cost you $250. But during that 7 hour day, you should be able to hit at least 25-50 places. And the higher the number the better, because at least half of those prospects aren’t very good prospects. It could be a company with just one guy and his assistant, so chances are they won’t need a lot of custom shirts.
If you were able to see 25 people and get their contact information, that means you spent $10 per lead (potential customer). Let’s say you get 3 customers out of those 25 leads, and the average sale for each customer is $280. This makes that an $840 day in customer sales. Subtract your marketing costs and you made $590. Which is not too bad. And even once you factor out all your other costs for creating the orders, it’s still a profitable day.
The two most important calculations are: How much does a lead cost? How much does a customer cost?
In the above example, it cost $83 to get a customer ($250/3). And it generated a $280 sale. So was it worth it to get that customer? Once you calculate in all your other costs to fill the order you want to then take a look at the value of that customer. Because once you look at the math we talked about in the previous blog post, you may find you didn’t just get a $280 sale, but $7-10,000 in sales over the course of a three-year period.
Although there is no guarantee for the longevity of a customer, you still want to do these calculations and know that it may take you a while to work out the longevity of a particular kind of customer. By watching your numbers you can allow the statistics and probability to take care of themselves. If you continue to calculate the averages for your customers and continue to get better at calculating them, the more accurate your calculated predictions will become.
Also to keep in mind is that everything you do has a long-term value. Because although you only got 3 sales out of the 25 leads, you still have 22 people who gave you business cards and could be future customers. Don’t just throw away the cards, keep them and call them again a few months later, especially if they say they don’t need shirts right now, but maybe one day later.
Going back to the idea of driving around and getting potential client’s contact information, the better you get at it, the better your numbers. Let’s say instead of 25 cards, you’re able to get 30. But you spent the same amount of time and money getting those cards. Now your cost per lead is $8.33. And let’s say you were able to get an additional sale out of it, so now it cost $63 to get each customer. Even with a $280 sale per customer, you’ve now got $1120 in customer sales, but your cost is still the same ($250), so now it becomes an $870 day in sales once you subtract the marketing costs.
But not everyone is going to want to drive around, and it may not be an effective marketing strategy for everyone. Once you calculate the numbers it may not be worth it. So what other marketing activities could you spend that $250 on?
- local newspaper
- magazine ad
- newsletter ad
Think about the neighborhood your business is in. Perhaps there’s a community newsletter and you often see a few restaurants and take-out places, and maybe a martial arts place in the newsletter and you think that an apparel add could work in the newsletter and that these businesses might be interested in your product.
First off, figure how much the ad is going to cost. Perhaps it’s going to cost you $500, but it has a further reach than you driving around. But as with anything you need to track where your sales come from in order to assess if the ad worked. Ask your customers where they heard about you. And know that you may not get immediate sales. If you drive around for a couple weeks and don’t get any sales that month, and decide to place an ad the next month, and get a ton of sales by the end of the month, was that really from the ad, or was it from you driving around? If customers can order online from you, make it a question on their order form, or give out a coupon code specific to the ad. To help track potential leads you could even give a specific Website URL for the ad that tracks visitors and it’s only available from the ad.
You want to know what that $500 in marketing got you. Let’s say you got 5 potential customers coming to your website from the ad. The lead cost is pretty high at $100/lead, especially when compared to you driving around. But because the customers came to you, the close rate for the sale is going to be particularly high. Even saying that you get three sales out of those leads and each is still a $280 sale, you still come out ahead because you had $840 on sales and spent $500 on marketing. Your net profit is $340, and it cost $167 to gain each customer. Once you factor in the costs to make the shirts you may come out with a zero profit.
And in this situation, you may want to question, “Should I do this again?” Because compared to the first example where each customer only cost us $83, the ad cost us twice as much to gain the same number of customers. And you have a couple options, you can contact the newsletter company and see if there are other options for placing your ad at a lower cost, you can try running different versions of the ad to see if one has a better impact, you can look at improving your website if you got reasonable amount of leads but they never went through with an order, or you can decide that it’s too expensive and move on.
Something you may want to look into is if the newsletter or paper has a deal that if you sign up for a year it only costs $150/month. If you still get 1-3 sales every month, then it has greater value. You only need to put the time into creating one ad, and you may be generating $300-800 in sales each month.
Doing an Event
What’s it cost to rent a table? How much does your time cost to be there? Perhaps the table cost you $400 and your time to get ready for the event and be there cost you $320 (two 8 hour days), so the whole event cost you $720. Let’s say you meet 150-200 people who come by the booth, and perhaps none of them buying anything, but you get 100 of them on a signup sheet because they want to know when you’re doing another event. In this case, you only spent $7.20 per lead. And if 20 of those leads buy $40 worth of stuff each, your cost per customer is $36 and you made $800 in sales, so you pretty much only broke even on this event, once you factor in the cost to make the product.
Was it worth it?
You need to look at the numbers to determine if something is worth it. And you’re going to have to try these things and invest in experimenting. You’re going to have to estimate on numbers, or join the CAS Facebook group and ask other people how much it’ll cost to do a local show.
When you’re looking at your marketing data, you can’t let one day or one set of data determine the success of the campaign. You might go out one day and make a $3000 sale, but that’s probably not going to happen every day you go out. Or you go out and you only make $100 sale. The reality is you’re going to have better days than others and you’re going to find customers that you didn’t sell to right away. You can’t make all your assumptions from just one ad, or one day of driving around.
When you’re calculating your cost for marketing and your profit, let’s say your find you only made $1/shirt, and you’re thinking to yourself, “was that really worth it?” But don’t forget you also paid yourself $20/hour to do the marketing. So you still made a paycheck and managed to put some money into the company account. Because the reality of it is, your profit is the number you put into the bank at the end of the month, after you pay everything off, and that includes your salary. So that $1 per shirt you made last month, perhaps it was $50, is nothing to sneeze at. Even big corporations don’t always make a profit at the end of the month, after they pay off rent, employees,
So you still made a paycheck and managed to put some money into the company account. Because the reality of it is, your profit is the number you put into the bank at the end of the month, after you pay everything off, and that includes your salary. So that $1 per shirt you made last month, perhaps it was $50, is nothing to sneeze at. Even big corporations don’t always make a profit at the end of the month, after they pay off rent, employees, patents, office expenses, etc.
The Bigger Picture
Once you’ve tried out a handful of marketing strategies and you come up with numbers, you want to input them into the larger calculations we talked about in the last blog post – the referral value, and the long-term potential.
Perhaps at the event, you only broke even, but you made a couple really great contacts. And because you had a great connection with them their referral value and long-term potential is quite high. And you’ve already paid yourself, so even though there wasn’t an immediate profit, you’ve created a long-term business. If you know the market/customer type that’s at these events, you can determine their likelihood to be repeat customers and refer others. So sometimes it can even be worth it to lose money on an event if you can back it up with numbers, that you’ll make more in the future from it.
If you haven’t already, make sure to check out our previous blog post on The Value of a Customer. Once you get your numbers down from your marketing campaigns and can start to see what kind of profit you’re actually making from each of them, you can invest your time and money into the ones that are really working for your business.
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