What is the Golden Ratio for Growth?
It’s time to get to know the numbers in your business.
Ideally, we want to be able to run our business like it's a machine.
We want to know the quantifiable goals within our business and how to grow and sustain the business.
These are the essential numbers that you need to know to run your sales and marketing strategy.
This will help you know where to invest your time and money so that you can grow your business.
1) KPI
The first term to understand is a KPI, which stands for Key Performance Indicator.
These are all the important inputs and outputs that tell the health of your business.
Everything we're going to talk about here is technically a type of KPI.
2) ROI
This stands for Return On Investment.
That's probably not a new term for you.
How much do you earn based on what you've spent?
3) CAC
This stands for Customer Acquisition Cost.
That is the dollar amount that it costs you to acquire any new customer.
This is important for so many reasons, especially if you're talking about advertising.
It is also a super important factor in placing a valuation on your business.
Anybody that may want to buy or invest in your company is going to want to calculate the cost of adding a new customer.
4) CLV / ACV
This stands for Customer Lifetime Value.
Exactly how much money do you make on a customer?
(sometimes it is more appropriate to look at this as Annual Customer Value, rather than lifetime)
Now that you've got the basic terms and principles down, let's talk about how you would actually put these into action.
Let's say for example, you've got a stellar marketing strategy.
Let's start with a traffic source.
Whether that's foot traffic or web traffic, you have to be able to get people's attention.
From there, a certain percentage of them will become Leads.
We'll say a thousand people = a hundred actual leads.
The next level down the funnel, some of them become a Prospect.
For every hundred leads we may get, say 10 prospects.
From there, one will become a Customer.
And so you can see that some numbers and some ratios are already developing here.
For every 1000 people that come through your initial traffic source,
100 of them become leads,
10 of them become prospects
and 1 becomes a customer.
At this point, the funnel is very predictable.
One thousand visitors from our traffic source becomes one new customer.
So we've got to figure out how to get a thousand people from our traffic source.
Whether that's from social media, SEO, email, it doesn't matter at this point.
We just need a thousand interested people into the top of the funnel.
If you are able to take them from lead to prospect and turn them into a customer, then it's very simple.
All we need to do is then figure out how to get a thousand interested people.
The next important question is:
how much can we spend to get that number of interested people?
Well, what we need to figure out first is the lifetime (CLV) or annual customer value number.
We need to know how much we're going to earn so we know how much we can spend to get that customer.
So let's take a perfect world and say that it is $1,000 that we're going to make from each customer.
You see what we then need to do, right?
If $1,000 is the CLV or ACV, well then we need to multiply that by 10% to get your Cost Per Prospect (CPP).
So that means we need 10 prospects to create one customer.
That makes each prospect worth $100.
Multiplying that by our conversion rate from lead to prospect (10%), we get a $10 value for each lead.
You need 100 of them to equal one customer.
Using the same 10% conversion rate from Visitor to Lead, that brings us to a nice round number of $1.
But wait, we're not finished yet!
What that tells you is how much each visitor is worth to you.
That does not tell you how much you can afford to pay for it.
You have to pay a lot less than $1 per visitor (if you want to make any money, that is).
You're going to have to do a lot more digging to determine your margins, right?
But let's say for example, that you can successfully generate a visitor for 10 cents.
(Entirely possible with PPC or Facebook Ads, btw)
Using this funnel, multiply that by 10 (our conversion rate).
It's going to cost you $1 for 1 lead.
Again, multiplied by our conversion rate, it's going to cost you $10 to get a prospect.
Then it's going to cost you $100 to get a customer.
Therefore, your Customer Acquisition Cost (CAC) is $100.
Now we're getting to the good stuff — we have our first golden ratio!
If you can acquire a customer for 1/10 of the cost that you earn on that customer, that's a 1000% ROI or a 10X return on your marketing spend!
Using our example, the CLV is $1,000.
We just determined that you can land a customer for only $100.
The golden ratio here is $100 : $1,000.
Go ahead and apply some 4th grade math to reduce the fraction and you have a CAC : CLV of 1 : 10.
Finally, factor in your other costs of doing business to determine your CAC to Profit ratio.
If you make say 30% margins, which is great, you're actually walking away with a 1 : 3 CAC to profit ratio.
If you told me there was a way to spend a dollar and make $3 in profit, I'm buying that business!
This is what a true sales and marketing system should look like.
Can you say that about your own? If not, schedule a Discovery Call today.