See in these marketing notes why knowing these 7 simple to access numbers can optimize your small business marketing strategies which keeps your business from dying a slow agonizing death

Hey You,

It’s Lewis a.k.a. Nerd #2.

Business, boiled down to it’s essence, is nothing but math and psychology.

I know if you’re like me, you hate math. Get over it.

If you don’t figure out these numbers in your business that I’m about to show you (which you can easily do with the stupid simple calculator you have on your phone) and know them inside/out then you’ll never be able to grow your business consistently, over time.

They say to never say “never”. Well I’m saying “never”. Mastering these numbers is THAT fucking important.

Now let’s get to it . . .

First Number To Master: Average Transaction Size

This is exactly what it sounds like. This number represents the size of an average sale in your business. Remember, an average sale is
defined both in terms of revenue or gross profit.

How do you get this number?

For the customer group and the time period that you’ve chosen, add up all revenue from all transactions to get total revenue. That’s the first step.

The second step is to count the number of transactions in the group.

Whether you’re looking at shopping cart records or physical receipts or sales slips, or what have you, count the actual number of transactions. Third, then divide that total revenue number by
the transaction count; that gives you an average transaction size.

That’s it.

Second Number To Master: Average Customer Life

This is how long your average customer does business with you.

It’s a very important number to know. If you keep a customer for six months, that will be very different from keeping a customer for 10 or even 20 years, and it has radically different implications for your profit.

To calculate this is very simple – all of these metrics are.

We’re going to do it using months. Take the date of the most recent purchase, whatever it is. It doesn’t matter if it was from three years ago; it doesn’t matter if it was last week. Take the date
of your most recent purchase and subtract from it the date of the first purchase, and then add one.

Do this in months.

So if we’re looking at December 15, 2011, just call that December 2011.

Subtract from the most recent purchase date the first purchase date, then add one. That will give you the life of that customer in months.

Now to get the average for your representative sample, add all the lives of all the customers together; that gives you total customer lives, and then divide the total customer lives by the total number of customers – again, only using your sample data – and that’ll give you the average customer life, a very interesting number.

Third Number To Master: Average Frequency Of Purchase

So now we know how long that customer is going to stay with us; now we want to know how often they buy.

You can see what’s happening here.

We have the average transaction size, we know how long they stay with us, and now we know how often they buy from us. This is very powerful information to have.

You only want to use customers who have made more than one purchase – weed out customers who have only purchased once.

For each of customers who have made multiple purchases, count all of their transactions, just for that one customer. By customer, count all their transactions.

Then, take the total number of that customer’s transactions and divide it by that customer’s life in months.

That’s going to give you a frequency of purchase for that one customer.

Next, to get the average frequency, sum all the frequencies for all the customers, and divide that sum by the total number of customers.

That will give you the average frequency of purchase for any customer in your sample.

Fourth Number To Master: Average First Purchase Size

In many businesses, the first purchase is going to be a considerably different amount than subsequent purchases.

It could be smaller, and it could be larger, but it’s often fairly different.

Let’s look at purchasing a printer. The first purchase would be for the $2,000 laser printer. The ink, however, is only $100 a pop.

The first purchase is $2,000. On average, if you sold those
printers over and over again, the first purchase is an average of $2,000, subsequent purchases are $100, the average is a useful piece of information but it may be misleading.

Similarly – and it may go the other way – your first purchase may be an e-book for $47, which then becomes the basis for your selling them an audio program, which then leads to you selling them into a $10,000 a year coaching program that gets recreated each year.

So once again, the first purchase is very different from the ongoing purchases. We want to separate those, so to calculate average first purchase – often based on revenue; but the profit numbers would be more interesting – total all first purchase revenue for every customer in your sample, and divide that by the total number of
customers.

We’re just going to look at the first purchase revenue (or profit) of all of those customers in your sample, add them together, divide that sum by the total count of customers, and that gives you average first-purchase revenue.

This is mostly interesting to analyze how much money you can spend to acquire a customer and still break even, at least on the first purchase.

Fifth Number To Master: Lifetime Customer Value or Lifetime Customer Profit

This one is the business building expert, Paul Lemberg’s all time favorite numbers.

Some people calculate lifetime customer revenue. I want you to have both of these, absolutely. Whether you do one or several of these other calculations in profit or revenue, you will want to have both.

You’ll likely find that lifetime customer profit is the most interesting.

So for each customer, total the revenue (yes, and profit) from all of that customer’s transactions over the past three years.

It’s very important to do this over three years if possible, if you have three years of history, because of the discrepancy that many businesses have in transaction size between first and subsequent purchases.

We want to be able to smooth this difference out and understand what a lifetime looks like.

Take the past three years of revenue and sum that together, and then divide that by three to give yourself a one-year number. This gives you an average of one year for this one customer.

Now multiply that one year by the average customer life. Again, use three years of data if you have them; add together all the revenue. That gives you a total.

Divide it by three and multiply that number by the average customer life in years.

When you add up the revenue, include everything – first purchase,
re-sells, up-sells, cross-sells – whether it’s products, whether it’s services. Throw in every single thing that customer has ever spent with you.
 
Do this for three years, divide it by three, and multiply that by the average life.

That gives you the lifetime customer revenue for that one customer.

Next, you have to average lifetime customer revenue, because that’s the number we’re interested in.

For your sample, sum up all the individual lifetime customer revenues, and divide it by the number of customers in the
sample.

That’s going to give you a very powerful number because it tells you how much each customer you acquire is worth to you.

This is one of the most important things you can know about a customer in terms of making marketing decisions.

If you do not have three years’ worth of data, what do you do? Of course, use as much data as you have, and divide by the appropriate number of years, or even months.

Start where you are, use what you have.

Sixth Number To Master: Cost Of Customer Acquisition 

This number answers the question: How much does it cost to acquire a new customer.

If you can contrast this with lifetime customer profit, the worth of a customer over the course of their life, and you know how much it costs you to get that customer, you know just about everything there is to know about your business and profitability and how much it will cost you to grow, and how much you will earn!

Calculate the cost of customer acquisition on a one-year basis.

For one year, sum all your marketing, sales, compensation, sales commission, sales expenses, everything that has to do with getting customers – sales management, everything, travel expenses for salespeople, if you have them – all your marketing expenses, all your online expenses, sum that all together for one year for all your customers in your company.

This can’t be calculated based on your “sample” because you won’t be able to get at the expenses at the transaction level or at the sample level.

These numbers should be taken right off of your income statement.

You’re not doing this by customer group. Right off your income statement, sum up all every single marketing-and sales-related expense, and divide sum by the total number of new customers you’ve acquired in that period of time (as in that whole year.)

This will give you one simple number, the cost of customer acquisition.

You can then translate this into a percentage as well by dividing the sum of all expenses by your total revenue.

It would be great if you could segment this by product type or by customer type. But generally it’s too difficult to get at that marketing and sales information by customer type or product type.

If you have a highly refined financial information system, you might be able to get this but most smaller businesses simply don’t have the data.

Seventh Number To Master: Return On Investment On The Cost Of Customer Acquisition 

We’ve already said that we can’t calculate this by customer or product category, and that we’re going to have to do this
for your entire company.

So total revenue divided by the number of customers, divided again by the cost of customer acquisition will give you one single number.

If you can break this information out by segment – product segment or customer segment – it’s great data to have
and very powerful information but for most businesses it’s just too difficult.

Obviously, the higher the return on investment on cost of customer acquisition, the better.

This is a powerful number when you’re going to banks to borrow money, or when you’re asking investors for money, or when you’re making investment decisions. It’s just huge for you.

Four Reasons You Must Know These Numbers

  • You will know how much your willing to spend to acquire a customer
  • Creates a point of view based on Lifetime Value and/or First Time Profit.
  • You can make choices on how much to spend based on Front End versus Back End sales and profits. 
  • The bottom line is that knowing these numbers sets you up to win.

Four Ways to Completely and Fully Monetize Your Business

1. Increasing the Overall Price Level

2. Increasing Average Transaction Size

3. Selling and Re-Selling Repeatedly

4. Keeping Your Customers Longer

Why You Must Fully Monetize

Getting a customer to buy from you is the hardest thing to do.

Once they are a customer and they trust you, they will buy and buy again.

This is how you become rich.

Now go get to work crunching these simple equations on your business. As a matter of fact, make sure you print this off using that tab at the top of the post and make it ritual to calculate and know these numbers.

This is what the majority of your competitors won’t do, mostly because they don’t know to do so or, because they’re too lazy. Leave them in the dust by taking action.

Talk soon,

Lewis LaLanne a.k.a. Note Taking Nerd #2 a.k.a. L.L. Cool Nerd

PS. These marketing notes came from Paul Lemberg’s timeless business mastery course, Formula 5. If you want the full notes on the 5 key areas of your business you need to master in order for your small business marketing strategies to stay alive, go here now to put your hands all over them <—–

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