“Money Math” is NOT simple or easy. But getting it right is essential to winning as a David against Goliaths, to getting more productivity from every invested dollar.
There many important parts to knowing your money math. Most of them are not fun for most small business owners. All of them contribute to greater profits when you know them and know how to leverage them.
Here’s one of the most important:
What’s a New Customer Worth to You?
It’s strange, but many small business people have no idea what a good regular customer is worth to their businesses. By calculating that, you should gain a better idea of what you’re willing to invest or risk to attract a good, regular customer.
It also tells you how important it is to keep your existing customers happy.
The cost of retaining a customer and even expanding a customer’s value is much less then getting a new customer.
5 Power Questions
To determine what you’re willing to invest in marketing, first discover what an average new customer is worth to you. To determine their value, answer the following questions:
1. What is your average sale (transaction amount)?
2. What is the frequency of your average customer? This calculation can be expressed in transactions or visits per week, month, or year depending on the type of operation you run.
3. What percentage of new customers become average regular customers? (We call this the “conversion ratio.”) This will undoubtedly vary depending on how that new customer was generated.
For example, someone buying for the first time using an aggressively priced coupon would less likely be a repeat customer than one who bought based on a personal recommendation of a friend.
To be more accurate, you may want to calculate this information based on several different criteria. Then, once you have the numbers for three or four scenarios, take an average.
4. What is the average life cycle of a new customer? That is, once you get a customer, how long will that customer continue to buy from you before he or she moves, gets mad, or no longer has a need for your product or service?
This length of time can generally be expressed in months or years. It may be a more difficult number to get, but do your best.
5. How many new customers are referred to you by your existing customers? When you gather information about a new customer, ask how they found out about you. One possible answer is “referred by a friend.”
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From Dan Kennedy, the provocative, truth-telling author of seven popular No B.S. books, thirteen business books total; a serial, successful, multi-millionaire entrepreneur; trusted marketing advisor, consultant and coach to hundreds of private entrepreneurial clients running businesses from $1-million to $1-billion in size; and he influences well over 1-million independent business owners annually through his newsletters, tele-coaching programs, local Chapters and Kennedy Study Groups meeting in over 100 cities, and a network of top niched consultants in nearly 150 different business and industry categories and professions.