We live in a touchy-feely online entrepreneur world that wants you to always be in touch with your “feeling” side as a business owner. While there is, indeed, a time and place for this “rule”, to stay in business, it’s more about the numbers. I don’t know how many times I’ve heard self-designated business gurus say, “Do what makes you feel good.” or ask, “What does your gut tell you?”
You can feel all buttery and flowery all you want, but if you don’t pay attention to key data in your business, you won’t know the well from the water.
How will you know if one of your products is profitable? Why do you seem to have no repeat customers? Is your genius marketing plan the only reason your product(s) sells well? These, among many other questions, are what you need to be asking to determine if you should or shouldn’t stay on certain business paths.
This article is Part 1 of a 2-part series where I will explain to you what numbers you should pay heed to if you want to become successful or maintain success in your business. In this part, we will discuss profit margin, break-even point, conversion rate, and the cost of customer acquisition.
Profit Margin is the amount by which revenue from sales exceeds costs in your business. Essentially, it is the measure of the profitability in your company. You would calculate the profit margin by dividing net income by net sales. To determine a healthy profit margin for your business, you would need to zoom-in on the following:
- The average profit margin for your particular industry and the size of your business (in customers and employees) could be a better indicator of if your profit margin is average or below average.
- Typically, a healthy profit margin is about 10% with 20% being above average.
- A high ratio means your business is generating a lot of profit for every dollar of revenue.
- A low ratio means your business’ costs are significantly reducing your profits for ever dollar of income.
That Break-Even analysis is the point in which the total cost and total revenue are equal. Essentially, it means the sales of your business exactly covers its expenses.
You would calculate your break-even point by dividing your fixed costs by your variable costs.
Factors to Consider:
- Low sales could negatively affect your break-even point.
- The lower your break-even point, the easier it is to get to or maintain profitability.
- To lower your break-even point, you will need to find ways to lower your overall costs. However, fixed costs would be more difficult to lower.
Your conversion rate is the percentage of people who visit your website that
Your conversion rate will be calculated by the total number of sales divided by the number of leads times 100.
Factors to Consider:
- The better your marketing strategy, the better your conversion rates.
- Your conversions could mean sales, subscriptions, or any other desired goal.
- A healthy conversion rate depends on your industry and the size of your business.
- A low conversion rate could mean poor marketing or there is an issue with your offering.
Cost of Customer Acquisition
The Cost of Customer Acquisition is the cost to convince potential customers to buy from you. It is calculated by the number of leads multiplied by 100. An ideal ratio is 3:1. In other words, the value of a customer should be 3 times the cost it took to acquire them (i.e. – if you spent $100 to acquire a customer, they should be worth $300).
Factors to Consider:
- If the ratio is close, as in 1:1, you are spending too much to acquire 1 customer.
- If the ratio is too high (i.e. 5:1), you are spending too little to acquire customers.
The following table is a brief overview of that must-need metrics to help test the success and failures in your business. These numbers will definitely tell you what you need to keep doing and what you need to limit or stop doing or fix for better results.
|Profit Margin||a measure of profitability or the amount by which revenue from sales exceeds costs in a business.||Net Income / Net Sales|
|Break-Even Point||the point in which total cost and total revenue are equal||Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)|
|Conversion Rates||the % of visitors to your website that complete a desired goal out of the total number of visitors (i.e. - sales).||Total Number of Sales / Number of Leads * 100|
|Cost of Customer Acquisition||the cost associated in convincing a customer to buy a product/service||CAC = Total Marketing + Sales Expenses / # of New Customers Acquired|
Thank you for taking the time to read this installment of The Better Business Journal!
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Establishing your business was hard. Maintaining and taking your business to the next level can prove to be even more difficult. It’s time to open up new opportunities for growth because Luck is not a Strategy!
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With much love,