Numbers are scary.
Not because of the whole “maths is complicated” thing, but because what those numbers reveal can highlight problems that are difficult to solve.
You’ve probably heard the expression:
You can’t improve what you don’t measure.
Well, this is especially true in marketing.
You have to know your traffic numbers. You have to know your conversion rates. You have to know which members of your sales team are performing.
The numbers might not make for pleasant reading, but this only emphasises the importance of paying attention to them.
This “head in the sand” reluctance to consider the facts isn’t a phenomenon unique to small businesses. Medium, and even large, companies can be equally as guilty of this form of denial.
A little while ago I worked with a company who were looking for some help with their marketing. They told me three things:
1) Their website was converting at 6%.
2) Most of their business came from repeat customers.
3) They’d recently generated 800 new visitors through AdWords, but it wasn’t proving to be a profitable marketing exercise.
I should probably add that I knew the person who helped them with AdWords, and he really knows his stuff. So I was confident that the AdWords campaign was managed properly.
But from just those three facts, I knew there was a problem.
Can you spot what it is?
The answer is that the 6% conversion is probably incorrect.
How do I know this?
Let’s look at the numbers.
If the website is converting at 6%, then the 800 new visitors arriving through AdWords should have resulted in…
800 x 6% = 48 new customers
Since most of their business comes from repeat customers, it’s safe to assume that many of those 48 new customers will make repeat purchases.
Now, at the time, I didn’t know what the average profit per customer was, but assuming it was just $100, that AdWords campaign should have represented…
48 customers x $100 = $4,800
Based on those numbers, unless they were paying in excess of $6 a click (not bad if you’re a mass tort lawyer, but ridiculous for everyone else), the AdWords campaign should have been a profitable one.
So, from that, my hunch was that the 6% conversion rate was inaccurate and probably artificially inflated by including sales from existing customers.
Basing your business decisions purely on overall conversion rates is very, very foolish.
The larger lesson from this example is that your understanding of your business is limited to how well you know your numbers. The more data you have, the smarter the choices you can make.
It’s important to know how well your website converts new visitors because this enables you to calculate the cost of generating a new customer. But it’s equally important to know how many of your customers make repeat purchases because this allows you to calculate the life-time value of a customer and, in turn, how much you can afford to spend on marketing.
These calculations can make a huge difference.
Let’s work through an example:
Your website converts at 10% (congrats!) and the profit you make from each sale is $100.
So, 100 visitors will result in 10 customers, with a total profit of $1000.
The average profit value of each visitor is worked out as…
$1000 profit, divided by 100 visitors, equals $10.
This means that, as long as your marketing spend works out at less than $10 per visitor, you’re going to turn a profit.
So far, so good.
But, if you also know that 50% of your customers purchase a second time (for simplicity’s sake, we’ll say that the second purchase is the same value as the first), then that means 100 visitors will, in the long run, results in 15 sales, pushing the total profit up to $1500.
Now, the profit value of each customer looks like this…
$1500 profit, divided by 100 visitors, equals $15
Providing those conversion rates are consistent, you now know that you can increase your marketing spend to as much as $14.99 per visitor and you’ll still turn a profit. Albeit a very small one.
What’s interesting about the above example is that, if you didn’t have the data on repeat spends, you wouldn’t be able to calculate the life-time value of a customer, and the amount you’d be willing to spend on marketing would be reduced by a third.
If you’re in a very competitive market, this knowledge can mean the difference between leading the pack, and languishing at the back.
Successful business people know their numbers but they also understand the value of viewing them in the correct context. Google Analytics is really helpful in this regard because it allows you to attach filters to your data. You can, for example, generate separate reports for first-time visitors and repeat visitors.
Don’t just look at one number. Consider them all, and consider them in context.
Numbers are crucial. But you have to be prepared to put the time and effort into measuring and analysing everything.