Marketing budgets for small businesses generally fall into the range of 5% to 10% of sales. If you’re running a start-up, you’re probably spending more like 20% to 30%. How do you know whether or not you’re needlessly crushing your business under the weight of your marketing budget?
Customer lifetime value, cost per acquisition, sales average and lead-to-sales ratio are four extremely easy ways to measure whether you’re doing smart things with your sales dollars.
Customer Lifetime Value
Customer lifetime value (CLV) is the total dollar value of a lifetime relationship with a customer. It’s important because it looks beyond today’s transactions and focuses attention on the value of long-term relationships. The CLV number is also an easy way to determine the upper limit on what to spend to acquire new customers.
For example, if the average customer spends $25 each time they make a purchase, buys four times a year and stays with your business for five years, that customer’s lifetime value to your business is $500. If you’re spending $50 a year per customer in marketing dollars, you’ve just cut your gross profit in half ($50 X 5 years.)
Cost Per Acquisition
The amount it costs to acquire a new customer is called cost per acquisition (CPA.) You use this number to figure out how much to spend on a marketing campaign.
For example, you create a landing page for a new promotion and spend $100 on keywords for a pay-per-click campaign. You get 20 responses that result in five sales. The cost to acquire each customer is $20 ($100/ 5 = $20.)
Now, take a look at that number. If that $20 spent with you is profit, you’ve run a successful campaign. But, if your new customers spend an average of less than $20 each, your CPA is negative. It’s time to do something different.
Sales average is the average amount customers spend with you. Logic says it’s a lot easier to get a bigger sale from a customer when they’re standing in front of you. One way to up your sales average is to focus your efforts on selling more per transaction rather than trying to get new customers through your door.
Offering add-on deals are an easy way to increase the average amount your customers spend during their visits. For example, a sandwich shop can increase its sales average from $5.42 to $6.91 with a simple question like “Would you like to add chips and a drink for $1.49?” That alone increases overall revenue 27 percent for each sandwich sale converted into a meal deal.
The lead-to-sale ratio identifies the audience you’ll need to close the greatest percentage of sales. This metric is particularly important if your market is other businesses, you offer professional services or have a long-term sales cycle (common for things like big-ticket items.)
As an example, your consulting business needs 10 prospects to generate five meetings to produce one client. In real numbers, that means to get 100 clients, you’ll need to prospect 1,000 people. Your conversion rate is 20 percent (one in five meetings result in real business). That’s a lot of work.
To improve your ratio, consider adding more value to your offers than your competitors. Small add-ons like an ebook or a free training session for employees are low-cost incentives. Also consider reducing perceived risk with a money-back guarantee.
Unless your goal is digging a money pit, a little attention to these indicators can give you a good idea of where to focus some attention.
Have you used these marketing metrics successfully, or do you have others that have increased your profitability? Please share.