The Marketing Equation

Share Button

Most business owners typically focus on either one or two aspects of their business: total revenue or net profit. The common mindset is increase one, and you’ll increase the other. But total revenue and net profit are results. The only way to change a result is to influence the components that make it. Think about it: you can’t bake a better pie with the same recipe – you have to change some or all of the ingredients.

There’s a better way to grow your business – it’s called The Marketing Equation. With this simple formula, I’ll show you how to change end results, such as net profit, by focusing on the variables that influence each one.

The only numbers you’ll ever need to know:

  • Prospects X Conversion Rate = Customers
  • Customers X Transactions X Average Sale = Total Revenue
  • Total Revenue X Margin = Profit

It’s important to understand that results cannot be changed. Everything before an “equals” sign is a variable to improve upon; everything after an “equals” sign is a result. The only way to influence a result is improve upon the variables that make up the result.

So, if you’re a business only focusing on Margin, you’re missing out on several other ways to improve your bottom line.

Step 1: Prospects X Conversion Rate = Customers
Let’s start with the first variable, Prospects. Since this is technically a result, we can influence and increase Prospects by marketing directly to a select group of suspects (people who demographically match your typical customer). You’ll also save money on wasteful “image” advertising, which cannot be tracked and only serves to make your advertising sales representative more commissions.

Successfully implement a unique selling proposition (USP) – the reason why someone should buy from you – and you’ll instantly improve upon the Conversion Rate of prospect to customer.

When you multiply Prospects and Conversion Rate, your result is Customers.

Step 2: Customers X Transactions X Average Sale = Total Revenue
When marketing to your Customers, maximize your follow up marketing, community relations and direct mail to make your business the obvious choice when Customers are looking for what it is you sell. Along with your USP, this is the only surefire way to increase both Transactions and Average Sale.

Multiply CustomersTransactions and Average Sale together and your result is Total Revenue.

Step 3: Total Revenue X Margin = Profit
In the final step, multiply Total Revenue by Margin, to calculate your Profit. If you’ve implemented all 7 steps of my marketing system, you’re no longer competing on price – you’re competing on value, and can easily increase your Margin.

The Marketing Equation, Illustrated
Let’s take a look at how slight improvements in one area to small improvements in all areas stack up:

This example shows how small improvements dramatically change your bottom line.

Let’s say your business has 100 prospects, and you convert 20% of them into customers. You then sell them 10 times throughout the year an average of $10 per transaction. You’ll make $2000 in sales. On your 10% margin, this results in $200 of profit. Not bad.

What happens if you improve just one variable?
If you’re like most businesses, you’re really only focusing on one area for growth. If you look at the second column, we’ve increased only the number of Prospects by 10%, to 110. This results in an additional $20 net profit, for a total net profit of $220. So, by improving just one variable by 10%, you’ve added an additional 10% in profit. Pretty good.

Minor improvements in all variables = dramatic results.
But you’re not just any business. You’ve gone through and implemented all 7 steps in the marketing plan, and you’re able to increase all factors by 10%. This returns greater than 61% in profit! It’s incredible to see the power of making minor improvements work together and build upon the small success in each variable to return a sum greater than the individual parts.

2 thoughts on “The Marketing Equation

  1. Peter

    Brian, have you ever seen a sales and marketing equation that factors in the cost of marketing? I’m looking for an equation that helps evaluate the effectiveness of each sales opportunity and factors in the cost of generating that opportunity. For example, A high closing rate is great, but if it costs you 40% of your gross revenue it’s not such a success. On the contrary free leads (sales opportunities) are great but not if your closing rate is 2%. Any thoughts?

  2. Brian Farrell Post author

    Great question. I suppose if you layered on another formula — that is, cost per lead or cost per sale, you could then play around with the variables to see how this impacts. Of course, you’d have to assign a value to free leads, even if it’s just an opportunity cost, so that the calculations return a figure.

Comments are closed.