On Tuesday, I talked about determining cost per lead. The next step is to determine how much a sale costs you.
From the example on Tuesday, we determined that the imaginary lead from In Style cost $2 per person.
Suppose you converted 10% of those people to buy a product worth $50 each. Ten percent of 500 people is 50. Fifty people times $50 is $2,500. The ad cost $1000. To determine your sales ratio, you need to divide the revenue by the cost of the ad. The result is 2.5. That means that for every dollar you spend with In Style, you get $2.50 of revenue. The sales ratio is 2.5 to 1. That ratio is o.k., but ideally you want a 5 to 1 sales ratio or better.
A sales ratio of 1 to 1 is no good. If you only ever earn $1 for every $1 you spend, you will have no profit. No profit means no growth, salary or return on investment for you, a business owner. It may seem preposterous that business owners would ever do something like this—but I see it all the time as a business coach, particularly with women. “Well, at least I made my money back,” is a phrase you should never, ever utter.
Let’s examine the same scenario for the lead from O.
Out of the 1000 people who responded, 10% bought a product worth $100. The total revenue was $10,000. (10% of 1000 times 100). The ad cost $5000. The sales ratio is 2 to 1. (Revenue divided by ad cost.) For this example, every $1 spent in advertising $2 in revenue was received. In the In Style example $2.50 was received for every $1 spent in advertising. Which is the better deal?
But what about time invested? We’ll get to that next week. (Don’t want to miss this information? Sign up for this blogs RSS feed on the left.)
Now it’s your turn. Look at the sales ratio you received for your advertising efforts. Based on that information, figure out which advertising you need to increase and which you need to abandon. Let us know the results in the comments below!
For the most part I agree but sometimes it’s worth looking at it from a wider perspective. If your sales ratio is 1:1 but your focus for that marketing effort was to gather leads, than that fact that you broke even is a good thing. And for some companies, looking at the lifetime value of a customer is more beneficial than just the initial sale. For instance if the typical first-time purchase provides you $50 in revenue but you plan to work your first-time customers into purchasing an ongoing program with you that might on average bring you $2,500 in sales for that one customer, than maybe a 1:1 ratio is not so bad. But your point is solid. Look at all your advertising efforts from a cost-per perspective so you can make decent comparisons and cut what is not working and expand what is!
Great thoughts! One comment I received via LinkedIn was from a woman who paid over $14,000 for one qualified lead! She considered it an expensive education investment.