In preparation for our seminar on March 26th at the Nashville Chamber of Commerce (together with the good people at Spark Marketer), we are outlining some of our thoughts about customer valuation and Return-on-Investment (ROI) here and over at the Spark blog.
In a previous post, we defined customer valuation and ROI and looked at why an understanding of those terms is important for all business owners. Now we will get down into some examples and the actual math of it all. Take heart!
Running the Numbers: Math!
If you’re paying for services (online ads, outside sales leads, affiliates, billboards, etc.) that are designed to generate prospects or leads, but you’re spending more on the services than you’re earning from the business they gain, then you have a problem.
In broad strokes, if you spend $1000 per month in advertising and only get $1000 in business, your return on investment (ROI) is 0%. In reality, it’s probably less than that because we haven’t factored in any costs of goods, your time, labor, overhead, shipping, etc. We won’t be getting that complicated with our math, so you’ll need to keep some of those variables in the back of your mind.
How much are you spending on gaining clients?
How much are you earning from these clients?
To know if you’re upside down in your numbers before you’re upside down, you have to know what a lead is worth. And to find that, you’ll need to collect the following numbers (look at a month’s range to keep everything consistent):
Number of leads
Number of sales
Average Value of a Sale
First, let’s look at your number of sales vs. your total revenue to determine the average value of a sale. If you sell a product, it can be pretty straightforward, but when you work in services, especially customized ones, it tends to be more grey . . . and that can be frustrating.
To simplify things, find your top-line revenue for last month. How many sales or transactions did you complete? Now divide your revenue by the number of sales to get your average sale value.
Example: Jeanette made $15,000 in January from a total of 30 transactions. $15,000 / 30 = $500 average sale value.
Sales Close Rate
Next, look at your number of leads vs. your number of sales. Think of it like this: How many serious prospects (leads) did you talk to last month about working together? How many of those have turned into business?
There! Whatever you just said to yourself when you read that . . . That was the answer! Just divide your number of sales by the number of leads and you have your close rate!
Example: Jeanette spoke with 100 people in January who were very interested in services (leads) and of those, 70 said “No” or “Not yet” and 30 gave a resounding “Yes” and have made a payment. So, 30 out of 100 means her close rate in January was 30%.
So What Are Jeanette’s Customers Worth?
When you put all those numbers together, we see that Jeanette’s 100 leads turned into 30 sales that brought in $15,000 in revenue. This means that, in January, each lead was worth $150 to her business (revenue divided by leads). Now that she knows how much those customers are worth, she’s in position to evaluate her marketing expenses against this revenue and move forward in confidence to further grow her business.