A simple formula for calculating the importance of your marketing

In marketing, revenue engine by neville

We all know marketing is important. Marketing generates leads for your business. When you have a lead you can nurture them and find out if they are an ideal client. Then you can figure out how you can help them, and eventually sell them one of your products or services.

It’s not always obvious how important marketing is. If you grew up as a marketer, or you’ve done some marketing courses, you have a pretty good idea. But if your craft is some other field, chances are that marketing is something you’ve heard of and may know a little about. How it drives your business might not be that obvious.

I didn’t grow up as a marketer

In fact, I still wouldn’t call myself a marketer. But I’ve had to learn how to do marketing because without it my business will not be a success.

My marketing journey started like many other non-marketing professionals. In the early parts of my career it was something other people did. They all clamoured about how important it was, and I took note but it wasn’t something I had to deal with.

It was only when I seriously got into my own business that the importance of marketing became clear. Without marketing you don’t get enough leads. Without enough leads you won’t have enough clients. And without clients you won’t have enough revenue.

Calculate just how important your marketing is

I don’t remember where I came across this formula. It seems so obvious though that I’m surprised I didn’t see it earlier; if it’s new to you I think you will find it useful.

Here’s the formula:

# leads x closing rate x average revenue = total revenue

Here’s how it works:

  • # leads is the number of leads you get over any given period. Let’s say this is one month.
  • closing rate is the percentage of those leads that turn into paying clients.
  • average revenue is the average revenue you receive from each client; and
  • total revenue is the total revenue from those clients.

Say you get 100 leads per month. Your closing rate is 10% so 10 of those clients become paying clients. If your average revenue from each client is $20, your total revenue is $200. Or expressed as a formula:

100 x 10% x 20 = 200

When I work with entrepreneurs struggling with their cashflow, I will often ask them how many clients they need. The first answer is usually “as much as I can handle”. But as we drill down into what they really need, they are often surprised to see just how few clients will make their business viable.

Insert your own numbers to see how many leads you need to have a viable business.

What can you leverage?

It now seems obvious that if you want more revenue, you have to increase the number of leads or your closing rate. So, for example, if you want to double your revenue you have to double the number of leads. You could also double your closing rate—something that is a little more difficult to do.

But there are other things you can leverage.

You could double the price of your products or services. In some markets this can work (we notoriously undervalue our own products or services).

The other thing we often neglect is repeat sales. If you provide great value and great customer service, the same client may come back for more. This client already purchased from you once, so the cost of getting them as a lead is much less than a cold lead. With just a little effort you can increase the customer lifetime value.

Quality over quantity

The Internet is full of “successful” entrepreneurs with tens, or even hundreds of thousands, of subscribers to their lists. With that number of subscribers, you need just a small percentage to generate decent revenue, right?

But it’s not just the numbers that count.

Quality is far more important than quantity.

The quality of the leads you generate for your business directly affects your conversion rate. A bigger list will usually perform better than a small list because not everyone is ready to buy when you are ready to sell. But a small, high-quality list beats out a large, low-quality list every time.

How much is it costing you?

There’s one more term you need to know, and that is client acquisition cost.

You spend time and money to do your marketing which eventually gets you paying clients. If you spend more time or money getting them than they actually deliver in revenue you won’t have a business for very long.

Calculating your client acquisition cost does not need to be complex. Total up what you spend on marketing, lead nurturing and sales activities and costs. Divide that total by the number of clients you get; the result is your client acquisition cost.

It’s too simple!

Marketing professionals will probably be jumping up and down at this stage saying “it’s a lot more complex than this!”. And it can be.

But if you’re strapped for time or money (and most small businesses are) this formula is a good start to calculating just how important your marketing is for your business.

Those leads are real people

As you become more expert at something you learn the local language. Marketing is no exception; terms like leads, prospects, client acquisition costs, channel metrics and PPC are a necessary part of educated marketing.

But those terms can easily make us forget that those are real people out there. We don’t like being sold to, we don’t like being thought of as a target, and we really don’t care for being just another prospect in the funnel.

So treat your leads, prospects and clients just like you would like to be treated. The quality of your list will go up, your conversion rate will go up and you will be working with people you like and who like you.