Understand Your Business With Marketing Math

by | Mar 29, 2016

Here’s your reality: As a business owner, you have to rekindle your long-lost affinity for marketing math, or just fake it as best you can.

I write for a living, and I can honestly say that one of the highlights of my writing career is that I get to spend my time working with words. For whatever reason, my brain and words get along well — they’re pretty chummy.

Understand Your Business With Marketing Math

I did okay in math growing up, but by the time I’d finished Calculus, I was glad to say goodbye to the subject and put more of my energy into what I do best. You probably were the same way, unless you belong to the rare breed of people who can’t get enough of math. Like me, you found yourself drawn to a certain subject and invested yourself in it: business, engineering, technology, art, marketing…

Marketing math is what tells you whether your marketing is working. However, the right calculations are probably different than what you’ve encountered so far in business finance.

As mentioned in Chapter 2 of Newsletter Pro CEO Shaun Buck and Dan Kennedy’s “No B.S. Guide to Maximum Referrals & Customer Retention,” Dan writes about the importance of one calculation in particular: The cost of acquiring a new customer. Do you have an accurate dollar figure in your head right now for how much a new customer costs?

There’s a lot that goes into the acquisition of one new customer. Think of all the public advertising, marketing, promotion, and promotional discounts for the first transactions you have — and then add in the percentage of your overhead that new customers represent. On top of that, even if you don’t take a salary, you still need to factor in the time you spend bringing in customers.

marketing math

Marketing Math In Action

For example: Assign yourself a hypothetical salary of $50 an hour as a reasonable baseline.

Now, add up all the expenses you have: maybe $15,000 a month on advertising (including $1,000 for the time you personally spend on marketing), and another $20,000 for customers who pay once and never return (representing about 30 percent of your $60,000 per month overhead).

That’s a total of $36,000 per month — and if that expenditure nets you 300 customers in a month, each customer costs you $120 to acquire.

But there’s more to it than that. It may cost $120 to acquire the customer, but failing to keep the customer costs more than just $120. The lost customer actually costs $240, because you’ll have to pay another $120 to replace him after already investing $120 to acquire him.

And it gets worse — most customers bring in at least one other customer through referral in a year, so you miss out on that customer too, bringing your total cost to $360. That’s the attrition cost, and it’s brutal for a company that’s trying to grow.

To finish out the math problem, how much could you spend each year on retention marketing and still come out ahead? Well, if it costs you $360 every time you lose a customer you’ve acquired, you should at least be willing to spend up to $240 (the acquisition cost of a new customer). And as an added bonus, happier existing customers tend to spend more with you.

Retention and referral systems are investments that take your attention, time, money, and energy, but the math doesn’t lie — keeping customers you’ve paid to acquire and getting their referrals is a highly beneficial marketing strategy.

Marketing math may not be your favorite subject ever, but it’s an invaluable tool for helping your business succeed. Learn more about what you’ll need from the “No B.S. Guide to Maximum Referrals & Customer Retention,” available now from Amazon, Barnes & Noble, and other booksellers!

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