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The Importance of Knowing Your Numbers

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By Edward Razzell · Sep 10, 2020

If you don’t know how much new business is worth to the bottom line, advertising will always be guesswork.

There’s no need to ‘eyeball’ this either. You can sit down with your books and work out objectively how much every customer on average has been worth to the business.

This information lets you know whether your advertising is worthwhile or not by relying on objective data, rather than subjective opinions that could be wrong, despite best intentions.

It’s absolutely paramount that you work out how much new business is worth, and how much a new lead on average is worth to the business. Because once you are armed with this information, you can then know with certainty whether your advertising is growing your business, or depleting it of cash.

Without knowing all the numbers in the business, it’s incredibly hard to know if any of our marketing is successful or not.

To illustrate the point, here are some examples of how the same advertising plays out in businesses based on whether they ‘know their numbers’ or not. The examples may seem overly basic, but I’ve seen these scenarios play out in real time.

Example 1: A business who hires someone to do their advertising without knowing these numbers
This business doesn’t know the average amount a new customer spends in the business. They don’t know what their average conversion rate is. They don’t know any of these important numbers.

Now, they start advertising, and their advertiser starts generating leads and sending them into the business for £20 per lead.

Is that a good cost, or not?

It’s hard to tell, right?

Imagine that they generate leads for £20 per lead for six months, and then all of a sudden, the leads shoot up in price to £50 per lead. With this price increase in mind, should they keep on advertising?

Well, the owner, indignant at feeling like he’s getting a bad deal, turns off the advertising, and ceases to use the services of his advertising agent.

But, they are now in a position where they lost a source of new business (and they didn’t even realise it). But what else could they have done? They felt like they were getting a bad deal!

This kind of decision making, where there is no data to rely on, leaves only emotions to guide our decisions. The business is hurting as a result.

Now let’s take the same business, and rewind to the beginning for example 2.

Example 2: Business who knows the numbers first
Let’s take that exact same business, and work out what happens when they ‘know their numbers’.

Before hiring anyone, the heads of the business sit down and so some proactive work.

Having looked back through the books of all the years they have been in business, they have seen that their average value per customer is £6000. (This isn’t guesswork, this isn’t just off the top of their heads, this is from looking back through the books.)

Subtracting all of their fixed costs from this, they calculate that on average, one new sale results in £4000 in profit.

Having seen how many leads they have had in that time, and having seen the total number of customers, they see that their conversion rate is 1 in 5 (or 20%). From this, they can work out that their average value per lead was £800.

Now, knowing all of this objective data from their record books, they hire someone to do their advertising for them.

Their advertiser starts generating leads, and sending them to the business for £20 per lead.

Is that a good cost, or not?

Well, because it’s a new source of leads, their conversion rate is lower than last time. It’s now 1 in 10 (10%).

So some quick maths shows us that £20 x 10 = £200 per new customer, leaving us with £3800 in profit from that customer.

This advertising is practically printing money.

Now, instead of last time where the leads went up to £50, let’s imagine they go even further. This time, the leads balloon in price to £100 per lead.

Of course, the owner of the business is a little concerned. How did they increase so much?

The sums now work out at as £100 x 10 = £1000 per new customer. Meaning that there is £3000 in profit as a result of each new customer.

Well, it’s not as good as before, but it’s still profitable.

With this in mind, the business owner goes to his advertising agent, and asks him if there’s any new avenues they can look down to expand their advertising further and find even more profitable audiences whilst keeping the original advertising running.

Can you see how access to this data in the business completely changes the decision making of advertising?

Having access to the data allowed the business owner to make a rational decision based on the value that the new business was bringing, instead of grabbing the wrong end of the stick and purely focusing on cost per lead.

But of course, if all you have knowledge of is the costs, that’s all you can focus on – which leads to bad decision making if you want to grow your business.

Can you see how access to this data in the business completely changes the decision making of advertising?

I know it seems obvious – but the number of business owners who I speak to who don’t have this at the top of mind when making decisions is embarrassingly high.

So let this be one of your biggest takeaways from this lesson – ALWAYS KNOW YOUR NUMBERS. Unless your business is called ‘Coca-cola’, the chances are you don’t have the budget to throw ad spend at the wall, and hope it sticks.

Being able to put your name up everywhere your customers *might* see it without any method of measuring whether they bought from you as a result of seeing that advert is a surefire way to go broke.

Of course it’s certainly possible, but not really at the level of any business that can’t blow through tens of millions in advertising without any expectation of much in return.

Once you know your numbers, your advertising can focus on building trust and creating leads. You can then work out exactly how much each lead is costing to generate. As long as they are within the accepted costs, you then know that your advertising is growing your business – and you can know that extremely quickly, meaning you can turn off any ads that go above the accepted limit without waiting to blow through wads of your budget on unprofitable advertising.