Build a Bigger List With Basic Math
Dear Business Builder,
When Clayton and Wendy asked me to move down to North Carolina almost a year ago to work with them full-time, I jumped at the chance.
My wife and I sold our house in record time, packed our bags, grabbed the cats, put some Jimmy Buffet on the radio and headed south to the Great Smokey Mountains.
I knew right away that working with Clayton everyday would give me a world-class education in both copywriting and direct marketing. And these last eight months have put my learning curve into hyper-drive.
And now that I’m hip-deep in the numbers behind multiple marketing campaigns on a daily basis, I’ve developed a new appreciation for basic math.
For the simple reason that …
Your ability to generate massive amounts
of new customers
is directly determined
by your ability to do simple arithmetic.
Warning: For a mathematician, I’m a great copywriter. But I had Pete – über web guy and actual mathematician – check my numbers. So if anything doesn’t add up, Pete’s messing with me.
Let’s look at this in terms of return on investment. For this example, we’ll use an online new customer acquisition banner ad campaign that looks like this:
Prospects see the banner ad and click on it. This takes them to a squeeze page offering several free reports and a free subscription to a newsletter. Once they opt-in, they are redirected to a landing page selling a product.
This is just one way to successfully run one of these campaigns. It’s not ALWAYS appropriate to use a squeeze page. Sometimes it’s better to use a product landing page that has sign up options, but that’s for another article.
So you run those ads on four sites you think perfectly target your prospects.
Unfortunately, the margins from one media placement to the next are very different:
- Site #1 hits it out of the park with an up-front ROI of 250%
- Site #2 pulls break-even with 100% ROI
- Site #3 gives us 50% ROI
- Site #4 a mere 25% ROI
For the sake of argument, let’s say each one of those cost you $3,000. And each one gave you the exact same number of new customers, say 300.
So the numbers look like:
- Site #1: $3,000 at 250% ROI = $7,500 (for a $4,500 profit). 300 new subscribers generated at a profit of $15 each.
- Site #2: $3,000 at 100% ROI = $3,000 (for a $0 profit). 300 new subscribers generated for $0 each – they’re FREE!
- Site #3: $3,000 at 50% ROI = $1,500 (for a $1,500 loss). 300 new subscribers generated for a cost of $5 each.
- Site #4: $3,000 at 25% ROI = $750 (for a $2,250 loss). 300 new subscribers generated for a cost of $7.50 each
Which of these campaigns would you continue to run?
Many people’s first reaction is to say to keep running the ads on sites one and two and cut their losses on three and four. But those of us who know basic arithmetic say HOLD ON!
Let’s look deeper.
When you combine those four campaigns together what do you get?
Exactly. You just ran four tests with an initial cost of $12,000 to grow your list by 1,200 and gave you sales of $12,750. You made a profit of $750 and got 1,200 new customers.
You use the high-performing campaign to subsidize the lower-performing campaign so you can build a bigger list.
“So what,” you say, “If I cut out the low performing sites I can make a bigger profit.”
To which I say, “Keep up with me, Sparky. You’ll make more money this way.”
The better your backend sales are
the more aggressively you can go after
new customers
If you were completely ignorant of direct marketing fundamentals and the only product you had to sell was the product you used on your acquisition campaign – you have to make money on the initial transaction.
Because you’ve already sold your only product when you acquired the customer. And that dramatically limits where and how you can market your business.
But as a savvy direct marketer, you’ve got a second product … a third product … a fourth product and more to sell to new customers.
And if you bring 1,200 new folks onto your list in a month, a certain percentage of those people might buy something else. And the better you are at helping them find additional products or services they want to spend money on, the higher that number will be.
Let’s do some more math.
You’ve now got 1,200 new folks on your file. It’s time to promote something to them. Say you have a $300 product they haven’t seen yet that would be perfect to help them achieve whatever it is they’re interested in doing.
If you create an email campaign to those people in the first month they join you and you get a measly 1% response rate, what happens?
Exactly. In the first 30 days you made an additional $3,600:
1,200 x .01 x $300 = $3,600
The next month you do the same thing with a $500 product and this time you get only a .5% response:
1,200 x .005 x $500 = $3,000
Two months out from your initial campaign and those 1,200 names produced an additional $6,600.
Apply those numbers back to your acquisition campaign and look at the numbers again:
- 1,200 names at an initial $750 profit.
- At 30 days, your profit is $4,350 ($750 + $3,600): ROI of about 141%. Each one of those names was $3.62 to you in the first 30 days.
- And at 60 days your profits are $7,350 ($4,350 + $3,000): ROI of about 167%. Each name is worth $6.12 at 60 days.
If through testing you can keep these numbers relatively stable, you can actually go after even lower performing media placements because you’re able to make up the cost in the first two months.
And that means you can go after more new customers even when you have to lose money on the initial transaction.
This is all about backend marketing. The better your product ladder is, the more products your customers will buy. The more effective you are at promoting your products, the more your customers will buy. The better your relationship is with your customers, the more products they will buy.
And that means you can spend more money to get more new customers.
One of Clayton’s past clients knew a qualified name was worth at least $650 to them. And that meant they could very aggressively promote to get those names.
There are no absolutes in direct marketing
All of these numbers are just examples.
Always be aware of the fact that customers you get from different sources will behave differently.
- It’s true when you compare different types of media: You might find that a customer who comes to you through pay-per-click spends three times as much as a customer who comes to you through co-registration.
- And it’s true when you compare variations within the same media: Customers generated with the same copy from two different websites may have two dramatically different purchasing patterns.
And customers who came to you through pay-per-click through one keyword group may buy and behave differently than customers who come to you through another keyword group.
By staying on top of these variations, you can make much more intelligent and profitable decisions when planning your strategy.
If you’ve been studying or working in direct marketing for awhile, you’re probably already familiar with the concept of lifetime customer value. This is simply the amount of money a customer will spend with you over the course of their lives.
But industry to industry, business to busines,s the amount of time a customer sticks around is different.
In the newsletter industry, customers often stick around for about 7 years. So someone who’s only been in business for a year or two can’t determine their true lifetime value. They have to go on shorter-term projections.
In other markets, a customer may only stay with a company for a few months.
So the numbers change. But it’s all still basic arithmetic.
The great Gary Halbert once said direct marketing at its core is nothing more than psychology and arithmetic. And while the arithmetic isn’t as ‘sexy’ as the copywriting, sales and market psychology, it’s critical to succeeding in this business.
Keep a close eye on the math in your marketing or your client’s marketing and you’ll consistently find ways to be more profitable.
To your faster success,
John Newtson
Editor, Life in the Fast Lane
THE TOTAL PACKAGE
Looking for resources related to this article? Try some of these.
Looking for more of John’s articles? Check these out.
Looking for past issues of The Total Package? Click here for our archives.
 |
Want to share or reprint this article? Feel free. Just give us full attribution and a link to our Home Page when you do. |
Attribution Statement: This article was first published in The Total Package. To sign-up to receive your own FREE subscription to The Total Package and claim four FREE money making e-books go to www.makepeacetotalpackage.com.
Related posts
4 Comments »
Join the Discussion!
Let us know what you think. Or ask us anything. Or offer your own sage advice.
The only rule: RESPECT THIS HOUSE! Postings that contain abusive language and/or personal attacks will be cheerfully VAPORIZED. One cross word and – POOF! – your well-thought-out post will be gone in a puff of smoke.
– Clayton
Comment by Caleb Osborne — September 1, 2007 @ 9:18 am
Yet another total package post that breaks down \”usually hard to understand\” stuff into simple terms even an arithmetic disabled person like myself can understand.
Great!
Caleb
Comment by Rob Metras — September 1, 2007 @ 7:58 pm
Very good math leson John. Clayton just keeps giving us more value.
Comment by Rob Metras — September 1, 2007 @ 8:01 pm
Now if only my English lesson would work it would be perfect.
Thanks againRob
Comment by Brandon — September 4, 2007 @ 7:19 am
Great work, guys! I always like hearing your input on the business side of direct marketing. Keep up the good content. Your comments are well received.