Today, I want to share with you some information about knowing your numbers. Quite often, I receive the feedback that clients don’t know what metrics that they should be looking at to measure marketing effectiveness.
In this 15 minute video tutorial, I take you through some broader business metrics before moving onto specific marketing metrics. As the world of marketing continues to evolve with more and more marketing platforms becoming available to businesses, it’s important that business owners keep abreast of some fundamental metrics. Even if you’re outsourcing your marketing or you have a team member looking after your marketing, as a business owner you want to have a robust understanding of what results you should be looking for depending upon which marketing initiatives you are executing.
Benefits of knowing your numbers
Whether you’re the one responsible for determining and executing marketing plans or your role is to approve the plan, you want to be aware of what metrics you should track for each initiative you are about to undertake.
- Know before you even implement a marketing tactic, what goal you are aiming to achieve and what marketing metric you will use to determine if it is successful, or not.
- Test, refine and learn so you can spend your time and budget wisely. If you’re not measuring performance, you could be wasting hundreds if not thousands of dollars on ineffective marketing. Conversely, if something is performing extremely well, do more of it!
- You are 100% confident in how much it costs to acquire a customer or client and which channels deliver the best results for your business model. These types of numbers are essential if you’re going to be looking for investors or looking to sell your business
So let’s have a quick look. If we just go over our business metrics and obviously, this is not exhaustive, but just to give you some top-level numbers that you should be looking at:
Gross Sales (Revenue) – Total turnover for your business
Gross Margin – (Total Revenue – Cost of Goods Sold)/Total Revenue x 100.
Opex – your operating expenses such as rent, electricity, salaries & wages
Net Margin – is your total revenue minus cost of goods sold + operating expenses
Some key marketing metrics applicable to business:
Cost per enquiry (CPE) – how much it costs in advertising spend to generate an enquiry. Can be an online enquiry form, phone call, direct message or other
Cost per Lead (CPL) – Same as CPE however depending upon industries one term may be used in preference to the other.
As an example, say I put a Facebook ad out and my goal is to drive inquiries, I might be a travel agent, or a plumber, could be a law firm, maybe an accountant at the moment, because we’re getting into tax time. Maybe they’re deciding, “Okay, let’s get on the front foot this year, and we’ll promote our services.” You might have a new product that you want to promote to help people have a smooth tax return for the year, so you might put together a Facebook campaign, and you know that one of your goals is to deliver X inquiries or leads, so that would be an example of how that metric is relevant to our marketing goal.
Cost per Sale (CPS) – it is the same as CPE or CPL however instead of it just being a lead or enquiry, it is an actual sale.
Cost per Acquisition (CPA) – the same as CPS however once again, the term used can be dependent upon the industry in which you are operating. CPS is generally a sale of product and would be used as a metric for an e-commerce store whereas CPA is used when measuring the cost to acquire a new customer. CPA could be used in a consultancy business, for example.
Average Order Value (AOV) – your total sales revenue divided by the total number of sales. If I did a total sales of $1,000 in a month, I would divide that by my number of sales to give me my average order value.
Conversion – The word conversion refers to how many leads, enquiries, website traffic ‘converted’ so it has slightly different meanings depending upon what you are tracking. For example, in regards to website traffic, I want to know from all my site visitors, how many ‘converted’ to an enquiry or a sale. If I generated 50 phone call leads in a month, I want to know how many converted from a lead to a sale.
So if I’ve had a hundred inquiries and I convert 25 of those into a sale, then I’ve converted at 25%.
Website’s generally convert at 2%. The formula is:
Enquiries or sales / site visitors *100
So that means for every hundred people that come to your website, 98 of them are going to bounce off without doing anything, or without inquiring or making a purchase. So just keep that in mind. So don’t be disheartened if you feel that you aren’t getting the conversions you wanted. As already mentioned, typically website conversion is around that 2% on websites.
With email marketing, we’d be looking at other metrics like open rates, click-through rates. So how many people open my email, and how many click on the content within the email? And it’s also good to see which content within your email campaigns that they’re clicking on.
Text messaging does generally give you a very high open rate. I think we all know our natural human response to text is to open it, even if we know it’s from a retailer or a business of some sort, we tend to open them. Whether we then click on the link within the SMS is another thing, but definitely a very high open rate. So you’d be tracking open rate and click-through rate, and also your opt-outs.
It would be something like a letterbox drop, and you could look at the total amount that you’re getting dropped. So let’s say it was 1,000, and then how many phone calls did you get, or depending on the call to action on that piece of communication, it might be a call to action that directs the person to go to your website, or use a QR code to go to our website and download some information, get a discount coupon, purchase a new product. Whatever the call to action is, you’d then be able to work out your cost per inquiry and cost per sale on that.
Formula: total number of phone calls (or whatever the call to action was) /Total flyers for letterbox drop 1000 * 100
CTA – Call To Action
It is the call to action that you put on your ad, your flyer, your social media caption, your website.
Some examples include:
- Hurry, sale ends soon. Call 1300 123 456 Now!
- Download Now
- Book Now
Facebook advertising is very trackable and accountable, any digital advertising essentially is. So you’d be able to look at your cost per click (CPC), so how many people click on the ad, and then how many actually convert and turn into a customer. You can apply that same approach with Google AdWords.
Depending how you’re planning to run your giveaway, you can certainly work out ways that you can track its effectiveness, and it also depends on your objective. So why are you doing the giveaway to begin with? It might be that you’re trying to grow awareness of your brand, you’re trying to increase your subscribers and/or followers.
Let’s say that your goals are to increase brand awareness and to increase your database, you would have entrants ‘sign up’ to enter the competition and they also will be added to your database. The total number of new people to your database is the increase in your database size (noting, you are likely to have existing subscribers enter so be sure to remove existing subscribers to determine the net growth of your database and do not just measure total entrants).
If you’re running an event it is likely that the metric you want to track is event registrations and/or ticket sales. So you want to look at how much you’ve spent to drive that sale, and that will give you a cost per sale.
It can be paid or organic, but let’s look at organic for this example. So you might be looking at, let’s say an Instagram account, I’m trying to drive awareness of my business. I also ultimately want to get people from my social media accounts onto my database, and definitely visit my website, so you could be setting up metrics to track that. And within Google Analytics, you can go into your website stats and see how many people are coming from each of your social media channels and keep an eye on that as well.
In this example, we could be tracking:
- Number of followers & engagement
- Number of followers who visit website and sign up to database (subscribe to newsletter)
- How much traffic is my website receiving from my social media accounts
Radio, TV, Billboard Advertising
When it comes to more traditional advertising such as radio, TV, billboard, they can be a little bit harder to track, but there’s definitely ways you could do it.
You might have a dedicated phone number for those advertising channels, so anything that comes in on that line you know has been generated out of that ad.
Let’s talk some numbers
So next, I just want to show you, sort of bring it to life a bit more. So let’s say in this pretend business, we’ve got $1 million turnover, so that’s gross sales, gross revenue, so gross turnover.
We have a 10% gross margin, so that means when we sell $1 million worth of sales, then we will make a $100,000 in gross margin as a dollar amount.
Now, let’s say our average sale is $5,000. That means our number of sales on an annual basis is 200 ($1 milion/$5000), and then if we just wanted to average that out, I could divide that by the number of months, being 12, which means on average, we’re making 17 sales per month, of which on average, they’re $5,000.
Generally, most businesses are seasonal, so this is a very static rate, but it gives you some idea of what that would be averaged over 12 months, and then you can apply seasonality.
We can then look at conversion, so leads or enquiries to sales. Most industries I’ve worked in, particularly B2C, will convert at around 20 to 25%. If you’re working B2B, so business-to-business, that can be much higher, anything really from 25 to 50% conversion rates, sometimes’ even higher.
I would need 68 enquiries or leads each month, if I can convert at 25%, to give me my 17 sales per month.
How much can you afford to spend on advertising to drive enquiries?
If my average sale is $5000 and I have a 10% gross margin, I am making a gross profit of $500 per sale.
Knowing that this business converts at 25% means I can spend between $0 – $125 ($500 / 4) on an enquiry however if I pay the top amount of $125 per enquiry, it means I may spend my entire gross profit on getting the sale – that means we wouldn’t be in business for long. We need the cost per enquiry to be more like $50 and even then if we convert at 25%, it means our cost per sale will be $200 ($50 x 4). Is that sustainable? This is the figure a business owner or marketer needs to be able to determine so that you can make smart decisions on where to put your advertising dollars.
THE POWER OF 2 – BONUS TIP
Something I’ve learnt and just continues to be true over my 20 odd years of working in marketing, is the power of two.
What I have learnt is that you need to realise the size of the audience that you will need to get the response and ultimately the sales that you are aiming for.
If you want to assess what you believe the impact’s going to be, this is a formula to help you do that:
The Power of 2
1. Audience Size x 0.002 = Response
2. Response x conversion = Sales
300,000 (audience size) x 0.002 = 600 (response)
600 (response) x 25% (conversion %) = 150 Sales