One of my main business mantras is "Know Your Numbers," and because numbers are the language of business, it is numbers that will ultimately determine your success.
Business is literally a numbers game, but what numbers should you know?
Here are seven metrics that will give you predictive results you can measure and manage for more sales and bigger profits:
1. The lifetime value of each customer. While there are more complicated formulas to determine this value, this simple version will give you a start:
If your average customer spends $20 per purchase, buys three times a year and stays with your business for five years, the customer's lifetime value to your business is $300.
$20 x 3 sales = $60
$60 x 5 years = $300
Now you have a working understanding of the worth of each customer and the types of resources you need to acquire and retain them.
2. How much it costs to acquire a new customer. I call this your Cost Per Acquisition, or CPA, and it can help determine how much you spend on any marketing or ad campaign.
Let's say you've placed an ad in your local paper for $200. You get 20 responses and 10 sales. The acquisition cost for each customer is $20 ($200/ 10 = $20).
If your offer results in at least $20 in profits on every sale, you've run a successful campaign. But if your CPA is $20 and you have little or no profit, or are acquiring customers at a loss, it's time to re-evaluate your marketing.
3. Conversion rates. Let's say you hand out flyers to people on the street. The campaign generates 1000 leads over a two-week period, and 100 of those leads buy. Your conversion rate is 10 percent (1000 leads / 100 new customers = 10 percent conversion rate).
Too low? Nowhere to go but up. Tweak flaws in your sales process, increase customer service, narrow your target or create a better offer.
Knowing where you are is half the battle in getting to where you need to be.
4. Your average dollar sale. The value of each sale is important if you are looking to generate repeat business or up-sell -- in other words, the "Would you like fries with that?" strategy.
Simple "add-ons" can add-up quickly. For example, a deli offering premium sides and bottled drinks increased average sale from $5.42 to $13.11 with a simple "up sell" script that increased overall revenue 144 percent within a few weeks' time.
5. Response rates. Conventional direct mail response rates will vary from 1 percent -- generated by using lists from a list broker -- to up to 5 percent -- generated by using what I call a "warm" list of current or past customers.
Online email response rates are generally around .1 percent. That means, to get 50 responses to a conventional direct mailing, you'll need to mail to a minimum of 5000 names with a great offer.
To get 50 responses from an email campaign, you'll need at least 50,000 names, knowing not every response will end in a sale.
6. Lead-to-sale-ratio. If you're in a business-to-business, professional services category or have a long-term sales cycle, your lead-to-sale ratio will give you an idea of the audience you'll need to target to actually close a sale.
Say your startup insurance business needs 10 prospects to generate five meetings to produce one client. To get 1000 clients, you'll need to prospect 10,000 people.
If your conversion rate is 20 percent, you can add value, guarantees or other ways of reducing real or perceived risks to increase your conversion rates to a 5:2 or 5:3 ratio.
7. Touches to sale. How many contacts or touches does your prospect need before they buy? The general rule of thumb in sales is that:
- Two percent of sales are made on the first contact/touch
- Three percent of sales are made on the second contact
- Five percent of sales are made on the third contact
- 10 percent of sales are made on the fourth contact
- 80 percent of sales are made on the fifth contact
It's generally accepted that on average, you need at least four to seven touches for a sale. So when should you stop touching? When you're asked -- otherwise, you never know when the timing is finally right for a sale.
Knowing your numbers and what numbers to know in the first place greatly empowers your decision making, and helps you better predict how your business will fare.
If you do your numbers and discover you need a 10,000 person database to get 1000 customers, your marketing plan is pretty simple: Get a list and an offer, then track and convert your results.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.