I'm an EMyth Certified business coach who helps business owners get more control over their business and their life. I work with owners to make changes so the business supports them in living the life they want to live. I also help them strengthen their leadership skills so the business can grow to its full potential.
An important tool in any business owner’s kit is a breakeven analysis. In it’s most basic form, this analysis tells you how much you need to sell to cover your costs.
You would use a breakeven analysis in any situation where you need to know how much you have to sell. For example:
Starting a new business or launching a new product
Considering a price change
Setting quotas or sales goals
Considering taking on new expenses
Before I get to the actual formula, I need to explain a few of the pieces that go into it.
Fixed costs: Your fixed costs are the costs your business incurs whether you sell anything or not. Some examples of fixed cost are rent, salaries, utilities, advertising, etc.
Variable Unit Cost: These are the costs you incur when you sell something. For example, the cost (to you) of the item or the materials, sales commissions, delivery cost, etc.
Unit Sale Price: What you charge for the thing.
Unit Margin: Unit Sale Price – Variable Unit Cost
Breakeven Units: The number of items you need to sell to cover your costs.
The basic breakeven formula is:
Breakeven Units = Fixed Costs / Unit Margin
So, if we had fixed costs of $5,000 per month and sold a $200 item that cost us $100 each…
Breakeven Units = $5,000 / ($200 – $100) = 50.
We would need to sell 50 units per month to not lose money. Of course, you would need to decide if selling at least 50 units at $200 per month is realistic.
This formula doesn’t predict demand or profit or anything else. It tells you the smallest amount you need to sell to cover your nut.
Here’s another example of how you might use the breakeven formula:
Let’s say you’re considering a move to a bigger, more expensive location. We’ll use the previous example as the situation at your current location. Your new rent is going to increase your fixed cost by $1,500 per month.
Applying the formula…
Breakeven Units = $1,500 / ($200 – $100) = 15
You would have to increase your sales by 15 units per month to cover the extra cost.
One last example. Let’s figure out how much you need to sell to reach a certain level of profit. Make one small change to the formula.
Unit Volume = (Fixed Cost + Desired Profit) / (Unit Sale Price – Unit Variable Cost)
So, if we wanted to end up with $2,000 in profit each month…
As a coach, I hear a similar story from many of the business owners I talk to. The stories they tell often fall into one of two categories:
difficulty with growth
an inability of the business to work unless they are at work.
The specifics are as unique as the owners themselves, but they reduce down to one of those two things.
The solution comes down to understanding that every business has a lifecycle. And each step requires different things of the owner. Trying to skip a step is asking for all manner of problems.
So, what are the steps?
Step 1: Infancy
Think about what happens in infancy. This is the time we develop the fundamental skills we will need for the rest of our lives. We learn to control our bodies, to walk, to talk, etc.
This is where you build the foundation for a successful business. It consists of all the unglamorous but critical work of:
Establishing a viable business model
Creating an organization to support it
Building the systems and processes that make it work
Creating the control systems to measure success
This is the foundation of the business. Without it, anything you try to do later will not have the support it needs.
Unfortunately, this is the step that too many people try to skip.
When someone starts a business, they are dreaming mostly about the freedom they will have (step 3). Then they start trying to grow (step 2) so they can get that freedom. They skip right over the first step and end up frustrated that their efforts are failing.
As someone once told me, “If you skip the start, you never get started.” Meaning you can’t jump straight to the result without doing the hard work to get there.
Step 2: Adolescence
When we hit adolescence, we grow rapidly. We get taller. We get heavier. We get stronger. We become adults. None of this would be possible without having gone through infancy first.
This is the case for your business, too.
In this step, the business…
Gets more complex
Gets better at doing what it does
This is a difficult stage for any business. For a business that hasn’t established the fundamentals in step 1, it’s all but impossible.
Step 3: Maturity
As we become mature adults, we are wiser. We have learned from our experience. We are established.
When a business is mature, it has become its own entity apart from the people who work there. It operates according to systems and procedures that were estabished in step 1 and refined in step 2.
Employees can (and will) come and go, but the business will go on. The people working there will operate those systems and produce the result expected by its customers and owners.
This is where the owner achieves the freedom they dreamed about when they started. At this point, they have created something that can exist apart from them. Now, this owner has the choice to be in the business or not.
Getting to this step simply isn’t possible without the hard work of the first two steps.
Frustrated that you can’t grow or you are chained to the daily operation of your business? I can guarantee you the source of your troubles lies in skipping or shortcutting step 1.
The good news is this. You can go back to the beginning any time and work through the steps.
That’s what I help owners do every day. I can help you, too. Get in touch to talk about how things can be different.
Do you want your marketing efforts to be successful?
Of course you do.
Like baking a cake, a successful marketing campaign requires the perfect balance of ingredients. Too much or too little of any, and the cake doesn’t turn out. Use a wrong ingredient, and you get something, but it isn’t the cake you were hoping for.
Same with marketing. Combine the right ingredients in the right proportions, you get a success. Don’t, and you get a learning experience.
So what are the ingredients of a successful marketing campaign?
Glad you asked.
Every successful marketing campaign is built from the right balance of:
Let’s take a look at each.
The market is the audience you are trying to reach. To get this ingredient right, you need to know who you are selling to. To do that, you need to ask and answer two critical questions.
First, who are they?
You need to know specifically what they look like. For those of you who sell to consumers, it’s things like:
do they have kids
where they live
If you sell to businesses, it’s things like:
You need to know what they do.
Where do they shop?
What do they buy?
How do they spend their time?
How do they make decisions?
What interests them?
Second, you need to know what their problem is.
Just like you need to know who they are, you need to know what their problems and pains are. If you can talk about what they’re feeling and what they hope for, they’ll believe that you understand them and can help.
The more focused this group is, the better. More on why that is so important when I talk about the message.
The second key ingredient to a successful marketing campaign is the message.
Simply put, the right message is one that speaks directly to your market’s problems and desired solutions.
How do you know what that is?
If you’ve done your homework on the market, you know who they are, their problems, and what they’re looking for. It’s time to put that knowledge to work.
Your marketing message needs to do three things:
Get the market’s attention
Make them believe you are a credible solution to their problem
Convince them to take the next step
As anyone who has dealt with kids (or juvenile adults) knows, there’s good attention and bad attention. You want the good attention.
How do you get it?
That means saying something that matters to them. A simple example of relevant would be a sign announcing ice cold water at a park on a hot, sunny summer day. Trying to sell that same water on the coldest winter day is an example of not being relevant.
What are examples of bad attention?
Saying or doing outrageous things, or anything that has nothing to do with what matters to the market
Intrusively interrupting people
Using misleading claims to get people to listen
Once you have their attention, you need to show them you are a credible solution to their problem.
There are many ways to do this. Here are a few…
Describe how you solve the problem in a way that shows them the benefits of your offer
Use testimonials of people like them who used your solution
Show your solution in action
It’s the power of the message that makes a narrow audience so important. When you are working with a small niche, you can speak directly to a big problem for them. As your audience gets bigger and more diverse, you need to water down the message. When you do that, the message loses all its power.
Finally, you need to convince them to take the next step. How?
It can be as simple as telling them what to do next (e.g., “Call now”, “Buy today”, etc.). To really seal the deal, make it clear what’s in it for them if they take the next step. If you’ve succeeded in getting their attention and showing that you have a credible solution to their problem, the market will want to take the next step.
You need to put your message in the place where your market will see it and be able to act on it.
Going back to our ice water example…
You want to reach people while their sweating in the park. That means setting up a sign in the park. An ad on Facebook isn’t going to work – even if it has the perfect message aimed at the right audience.
Getting this part right means thinking about where your market goes and what they are doing when your message would be relevant to them.
It also means tailoring your message to take advantage of the place you are advertising. Radio is not the place for a message that relies on a stunning image.
Bringing it together
Think about your marketing efforts. Are you working to get the ingredients just right? Or are you doing what’s easy?
What kind of results are you getting?
If you think you should be doing better, take a good look at whether you have the right combination of market, message, and media.
Ever had to deal with roller coaster sales or operational problems every time you get busy? These, and other growing pains, are telling you your business’ foundation is weak. If you don’t fix them, things could get ugly fast.
A house without a good foundation falls down. A business without a good foundation falters when you try to grow it.
As the owner, you are the leader. It’s your job to build this foundation for business growth. Once you do, you’ll have a sustainable business that can reliably function without your direct involvement.
The foundation for growing your business
When I work with my clients to grow their businesses, we focus on 5 things.
These 5 things, when put together, provide a rock-solid foundation. A foundation that will support the businesses growth now and well into the future.
Let’s take a look at each of them.
Purpose and vision
First, there’s the purpose and vision. This is all about getting crystal clear about why the business exists and where it’s going. Without clarity on these things, it’s difficult to make much progress growing your business.
The purpose is like the footings. It is the base that supports everything. It’s your reason why.
Think for a second…why does your business exist?
A lot of business owners haven’t ever thought about this. They usually answer this question with some version of “to make money” or “to support my family.”
These are fine goals. And they are the reason many people start businesses. But they’re not enough.
If money is your only motivation, you will reach a point where there isn’t enough money in the world to motivate you. To grow and be successful, your business needs a bigger purpose.
When you have a bigger purpose, you have a reason to get up every day and do the hard work of building something special. It gives you clarity and it gives you direction.
Speaking of direction, the vision flows from your purpose. It’s a clear picture of what your business will become. It is the destination on the map.
Have you ever tried to get someplace when you didn’t know where you wanted to go? Hard to do, isn’t it?
Only by knowing the destination can you have any hope of figuring out how to get there. That’s what your vision for the business does. It tells you where you’re going.
When you know where you’re going, you make better decisions about what you should and shouldn’t do.
Your Ideal Target Customer
Successful marketing is all about connecting with a rabidly loyal tribe. This step in our process is all about connecting with that tribe.
To understand your ideal market, you need to ask and answer two critical questions.
First, who is your tribe?
You need to know who your best market is. You need to know what their demographics are.
For those of you who sell to consumers, it’s things like:
where they live
If you sell to businesses, it’s things like:
You also need to know what they do.
Where do they shop?
What do they buy?
How do they spend their time?
How do they make decisions?
What interests them?
In short, you need to know them better than they know themselves. And, the more narrow this group is, the better.
Second, you need to know what their problem is.
Like you need to know who your ideal target customer is, you need to know their problems and pains.
What do they need?
What worries them?
How far are they willing to go to end their pain?
What type of solution are they looking for?
If you can talk about what they’re feeling and what they hope for, they’ll believe that you understand them and can help.
Your Value Proposition
Next, your value proposition for that ideal customer has to be spot on.
All that work you did to understand your customer lets you offer them the perfect solution to their problem. All you need to do is connect your offering to the outcomes your market desires. And deliver on those outcomes, of course.
When you know your tribe, and you put that knowledge to work in your offer, two things happen.
You can charge a premium price for your solution.
You crush your competition.
Think those things could help you grow your business?
Once we’ve worked through these first three areas, we’ve got a solid plan for a successful business. But plans are useless without implementation. The last 2 areas cover that.
The fourth area is creating the systems that make the business work. These, collectively, become your unique way of doing business.
What if you could be certain that everyone in your company knew exactly what to do and how to do it?
What if you could be certain that everyone in your company always did each task the same way every time?
What if you knew that everyone in your company was testing and improving the way they do things every day?
You’d be able to relax a little, wouldn’t you?
That’s the power of systems in your business.
Systems tell everyone how to do what needs to be done. That means you have consistency and predictability in your business. Systems are how you know everyone is doing each task the best possible way to get the outcome you and your customers want.
Systems mean your customers get the same result, on-time, every time.
Skeptical? Consider this. McDonald’s didn’t grow from one hamburger stand to what it is today because they make great burgers. They became what they are today by building a great system to produce the same burger no matter where in the world you order it.
The second most common thing business owners say to me, after “I need more sales” is “I can’t find any good people.”
The problem isn’t that there aren’t any good people. The problem is that there isn’t a purposeful plan of how to staff the company.
Building the team starts with understanding what the positions are. In team sports, there are specific positions with specific responsibilities. It’s exactly the same for your business.
You’ve got specific positions that need certain skills. Putting anyone into a position isn’t going to work. Or putting someone with the skills for one position into a different one isn’t going to work.
The first thing you need to do here is to define what all the positions are. Then define what they’re supposed to do. Then you can hire people with skills that match the position and be clear about expectations.
When you do that, you’ve got a team. Combine it with systems, and you’ve got a team with a playbook.
What do you get when you have a team full of people in the right positions executing a well-thought out playbook?
You get a well-oiled machine that produces the right result for the right people every time.
You get happy, loyal customers.
You get growth.
You get the business you were dreaming about when you first started it.
That’s what I hear most often when I talk to business owners.
Other contenders for most often mentioned issues include:
I need better systems
My employees don’t do what I want
I need to be more efficient
These are all problems that business owners face every day. Trouble is, they aren’t the actual problems these owners are facing.
Let me explain.
The problems most owners I talk to identify are just what’s visible on the surface. So when they try to solve them, the solution is just on the surface, too.
The problem comes back. Or it never goes away. Or it pops up again in a slightly different form.
That leads to an owner who is frustrated at playing a never-ending game of whack-a-mole. That cycle is the inevitable result of taking a superficial look at a problem and applying a superficial solution.
In my experience, the problem is rarely what’s visible on the surface. Those surface problems are merely symptoms of the real, underlying issue.
That lack of sales?
It’s often because the owner hasn’t done deeper marketing work. The deeper work of understanding their target market and crafting a compelling offer. As a result, the sales person shows up to the sale uninformed and unprepared. They’ve been set up to fail.
Problems with employees?
Often, those problems grow out of a failure to define a position. Or to connect the company’s vision and values to its hiring and employee development.
Customer service issues?
No thoughtful development of procedures to match delivery to customer needs and expectations.
If those underlying issues aren’t addressed, the problems will never be solved. The fundamental responsibility every owner faces is to focus on the basic, systemic workings of the business. If they stay on the surface, they will always be playing whack-a-mole.
So, how do you address the underlying issue? How do you even know where to look?
Get below the surface
One of the best approaches to this was developed by Toyota. It’s usually called the ‘5 whys’. The name describes the process…
When faced with a problem, ask why 5 times to get to the root cause of the problem. Here’s an example.
Problem: We don’t close enough sales.
Why? Because people think our product is too expensive.
Why? Because they think it’s a lot to spend for something that doesn’t completely solve their problem.
Why? It’s missing a key feature that is important to buyers.
Why? The engineers weren’t told to include it when they built the product.
Why? We didn’t know it was important to the target market.
After 5 whys, we’re getting somewhere.
What started out as a sales problem turned out to be a lack of understanding what the market wants. That begs the question, “If we didn’t know that, what else don’t we know about the market?”
The solution: Get a better understanding of what the target market needs. Use that to inform product development, marketing, and sales.
Fixing underlying issues usually fixes several things throughout the organization. Even things you haven’t yet figured out were broken!
This is a simple, but powerful approach. Here’s a tip to make it work even better.
Don’t play the blame game
When asking why, look for a process-focused answer.
For example, let’s say your problem is inventory piles up someplace it shouldn’t be. When you ask why, an answer like “Becuase Chuck is lazy” usually isn’t helpful.
In some cases, that might be true (and might be the cause of the problem). But, most of the time, its a process-problem, not a people problem. Look first for an answer like “There is no designated area for that inventory.”
So, the next time you’re pulling your hair out over a problem that just won’t go away. Consider that you’re playing whack-a-mole with your solutions. Stop. Look deeper.
An ounce of prevention is worth a pound of cure, am I right? I bet you heard that from grandparents, parents, teachers, and just about any other adult wanting to pass some wisdom on to your young self.
It applies to all kinds of things in our lives. Our cars or our houses are easy examples. I’ve never heard anyone say it’s better to wait for something to break than to do regular maintenance.
That idea comes up even more when we talk about your health. Few doubt the wisdom of regular check-ups. Or of dealing with problems when they are small and treatable.
So, why don’t more business owners think that way when it comes to their business?
As a business coach, I hear a lot of owners tell me they don’t have any problems.
It may be true that they don’t have any big, painful crises at the moment. It’s almost always true, though, that they have a lot of little things going on. Those little things may be hidden, or may only be a minor annoyance.
Those little things can quickly turn into major problems in the right conditions.
That customer who is a little behind defaults on a large invoice, causing a major cash flow crisis
That practical joker in the office gets you sued for creating a hostile work environment
Those “no big deal” service problems piled up to the point a big client fired you. Now you need to lay off half the company to stay afloat.
I could go on, but you get the idea.
Every one of those things could have been addressed with little pain if handled before the crisis. Not only that, but the solutions would have made the company stronger.
When you wait for a crisis to fix a problem, you can bet that fixing it will be:
Assuming, of course, that it’s fixable at all at that point.
Don’t wait for the next crisis to address those little problems. Create a process to find and fix those “little annoyances” everywhere. Not only will you avoid many unnecessary crises, you will build a stronger business. A business that can grow more and grow faster. A business that has motivated, engaged employees. A business that has happy customers.
Scour every aspect of the business looking for all the inefficiencies. Find all the hacks that employees use to get something done. Find all the friction points with your customers and between employees.
Then deal with them. One at a time. Thoughtfully. Systematically. Enjoy that you have the luxury of doing it this way because there is no crisis yet.
On the surface, this sounds simple. But the reality is this requires a change in mindset and culture. Like any journey worth taking, it requires some work.
Don’t know where to start?
A key part of what I do with my clients is to examine the business to find those little problems. Then we create plans to fix them.
If you wait until there is a crisis to call me, it may be too late to help you.
How are you doing on all those goals you set back in January?
If that question triggers a satisfied smile as you reflect on your progress, congratulations! Keep up the great work! Break open your celebratory drink of choice and enjoy the weekend.
If it makes you squirm a little, read on.
If you set some goals back in January, but then watched them fade away as the day-to-day grind took over, don’t worry. If you meant to set goals for this year, but never quite got to it, don’t you worry either.
Every day is a new opportunity to make a change.
Goals matter. They provide focus. They give us a purpose. They’re the reality check on whether we’re walking the talk.
You’re doing yourself a disservice if you aren’t pursuing something that matters to you.
If you set goals back in January, but haven’t made enough progress on them, it’s time to ask why.
Here are some common traps that people fall into:
“I don’t have time”
You have exactly the same amount of time as everyone else. It’s not an issue of time. It’s an issue of focus. Here are two big ways that shows up:
You’re spending too much time doing things you shouldn’t be doing. If this is the case, you need to learn how to prioritize and delegate.
You’re procrastinating. You’re avoiding the important work by filling your time with distractions. Take an honest look at what is holding you back from doing the things you need to do.
“I don’t know how”
A big stumbling block for progress is that you don’t know how to do what you need to do. Luckily, it’s the easiest one to overcome. In fact, you have a few options for doing so.
Virtually anything you’ve ever wanted to know about any subject is only a Google search away. The amount of learning resources instantly available for free is mind-boggling. At the very least, the search results will point you to paid books or courses on whatever topic you need to learn.
Find someone who does
This is one of the most difficult lessons for someone building a business to learn. You can’t (and shouldn’t) be doing everything yourself. A leader marshals the resources to get things done. Trying to do everything yourself will only hold you back.
“I tried. It didn’t work.”
Most of the things you try in your business aren’t going to work. When that happens, you try something else.
You try. You learn. You adjust. You try again.
If this mindset is a challenge for you, take a look at whether the goal is something you really want. Maybe the problem is that you’ve created goals you don’t actually care about.
If the goals are things you want, but you find yourself giving up easily, it’s time to reflect. Take an honest look at your beliefs. There is something in there telling you that you can’t do it. You need to find it and deal with it.
Make a Change
Sure, the year is half over. But that also means there’s half of the year left. That’s plenty of time to make a real difference in your business – and your life.
Go ahead. Dust off those goals you wrote down 6 months ago and recommit to making them happen.
Or, write some new ones and get started.
I help business owners figure out their goals every day. And I help them stick to making them happen. If you need help with either, get in touch.
They tell me about their challenges and frustrations. They tell me about the things they want. Things like:
More time with their families
More self-sufficient employees
And a million other hopes and dreams for their business and life.
We’ll talk about the changes they need to make to get those things. They’ll agree that they need to make those changes to achieve their goals.
Far too often, that conversation ends with some version of:
“I know I need to do that, but now’s not a good time.”
They go on to tell me why now isn’t a good time.
It’s the busy season
It’s the slow season
I need to finish this other project first
I need to hire someone
I need to fire someone
I need to increase sales
I need to get some more money together first
It’s better if I learn X before I start
I’m waiting for Mercury to be in retrograde
The Cubs need to win another World Series first
Most of us have used one of these as a rationalization for inaction. How many are you guilty of?
The truth is 99% of the time, these “reasons” are BS excuses. They’re the stories people tell themselves to avoid confronting the real reasons they are stuck.
It’s sad to see so many possibilities drifting away because an owner can’t take action.
It doesn’t matter how many great ideas you have if you don’t do anything with them. And, to be blunt, “I’ll do it later” is the rallying cry of a weak leader who settles for mediocrity.
I spend a lot of time helping my clients understand what’s really driving their need to defer.
It’s almost always fear.
Fear of change
Fear of failure
Fear of success
Fear of not being the same person they are today
Fear of not knowing what to do
The way you break through that fear is as simple and as vexingly difficult as this.
You didn’t take action because you were not willing to do what needed to be done to get the result you wanted.
You weren’t willing to do what needed to be done because you were afraid of the result.
How do you stop being afraid?
You need to decide that your desire for the outcome is stronger than your desire to stay in your comfort zone. This requires either a change in mindset or a change in circumstance. Changing your mindset is the better choice.
When a change in circumstance spurs you to action, it’s almost always because you no longer have any choice but to do the thing for your own survival. That’s one way to get there, but why make your life harder than it needs to be?
Changing your mindset is mostly about changing the conversation in your head. You need to stop focusing on all the reasons why something won’t work. That’s your subconscious saying “I’m scared” and giving your conscious a face-saving way out.
Instead, the conversation needs to focus on what step can I take now to get closer to the result. When you have that conversation, you look at where you are and where you want to be. Then, you draw a line between them and take the first step. Then the second step. Then however many more steps are needed to get the outcome.
This is a hard thing for people to do. But, do it you must.
One way to quiet your sub-conscious fear voice to constantly look for ways to push beyond your comfort zone. You build up the experience of success doing things that are uncomfortable.
With that experience, stepping out of your comfort zone gets easier and easier to do.
What thing that you’ve been putting off are you going to take action on now? Let us know in the comments.
John Wannamaker has a famous quote about advertising…
“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”
He said this in the early 20th century. This was long before computers, the internet, or most other modern tools to measure media consumption.
The quote, though, is still often recited. It fuels the false belief that advertising and marketing effectiveness can’t be measured.
You can measure marketing and advertising performance. In fact, you must if you expect to stay in business for any length of time.
What not to measure
When many people start measuring, they measure things that don’t matter.
By “don’t matter,” I mean things that have little relationship to the success of the business. Many of these are “vanity metrics” because they make people feel good about themselves.
So, what doesn’t matter?
Here’s a partial list:
Why don’t these things matter? Two reasons.
They don’t link to an actual business result (i.e., selling something). You need to jump through a lot of steps to make any connection between those metrics and your bank account. Even then, the relationship to results is very weak.
They don’t tell you whether or to what degree your marketing efforts are profitable.
The main point of marketing and advertising is to generate sales, right? Doesn’t it make sense then, to measure how well those efforts do at generating sales?
We can also all agree that spending more than we will make to get a customer is a good way to go broke.
Enough about what you shouldn’t measure. What should you measure?
The metrics that matter
The metrics that matter are your cost per X, where “X” is each key step of the marketing funnel.
We’ll start with the most important, Cost per Acquisition.
Cost per Acquisition (CPA)
Cost per acquisition is how much it costs you to get a new customer.
This tells you how effective your marketing and advertising is.
First, you want your CPA to be less than your Customer Lifetime Value, which I talked about last week. There are certain cases where you might be willing to spend more to get a customer than they’re worth. Those are limited, edge cases. For now, we’ll stick to the idea that you want to make money on a customer.
The first thing you must decide is what proportion of the CLV are you willing to spend to get a new customer. The answer depends on your costs, your desired profit, and your marketing goal.
We’ll use a target of 25% of CLV for our example. So, if our CLV is $1,000, that means our target CPA is $250 ($1,000 * 25%).
The key metric we’re going to use to decide if our marketing is working is whether we can get a new customer for $250 or less.
To calculate the CPA, divide the total amount you spent on marketing and advertising by the number of new customers you got. This simple method gives you the average CPA. It’s a good place to start. It can be quickly obtained from your P&L and customer records.
In practice, you would do this calculation for each individual marketing activity. That means, each different type of advertising or promotion you do. Within each type, you’d also look at individual campaigns, target audiences, and advertisements. This requires more sophisticated record keeping.
Each element gets judged on two things.
Is it at or below the target CPA?
How does the CPA compare to the performance of other activities?
If an element of your marketing is costing you more that the target CPA, then stop doing it. Or, change it to try to improve the CPA.
When comparing how different activities perform, to do more of the elements with the lowest CPA and less of the elements with the highest CPA.
Cost per Lead (CPL)
The cost per lead is like the cost per acquisition. Except this applies to leads instead of closed sales.
You want to know about how you’re doing at different points in the funnel is so you can diagnose what isn’t working.
I’m assuming a pretty simple funnel here. Prospects go from becoming a lead to becoming a customer. For many businesses, there’s an extra step or two before they become a customer.
For example, there may be the need for a sales call and/or a proposal because of the type of service you offer. In that case, the funnel has three or four steps (lead, appointment, proposal, sale). You would want to create a “cost per” metric for each step in the funnel.
The calculation is the same for each.
The process for setting a target value for your “cost per” metric starts with the target CPA and the expected conversion rates at each step of the funnel.
The target value for each step of the funnel is the target value of the next step multiplied by the conversion rate. You need to work backwards through the funnel from the sale to the top of the funnel for the method below to work.
Let’s say you have a three step funnel; Lead, meeting, and sale. Your target CPA is $1,000.
You know from past experience you will close 20% of the people you meet with. Your target cost per meeting, then, is $200 ($1,000 cost per acquisition * 20% conversion rate).
You also know that 10% of your leads schedule a meeting. Your target cost per lead is $20 ($200 cost per meeting * 10%).
To track your marketing performance, you look at these steps exactly the same way you looked at CPA.
Is it at or below the target?
How does the cost per compare to the performance of other activities?
By looking at each step in the funnel you can diagnose where the problems in your marketing effort lie.
Is your cost per lead great, but your cost per meeting is too high? You need to look at how you are trying to get leads to schedule a meeting.
Cost per meeting looks good, but cost per acquisition is too high? There’s something going wrong when you try to close.
Why is “cost per” better?
I hear a lot of people, especially those advertising online, ask “why can’t I just use click rates?”
Because clicks aren’t always related to making a sale, or to how much money you make.
Which would you rather have?
An ad that gets a 15% click through rate, but only converts 1% of them to sales? Or an ad that gets a 4% click through rate, but converts 10% of those to sales? (I did the math, the 4% click through rate ad gets you 166% more sales.)
Let’s go one step further and look at some revenue and cost figures. Let’s say a sall is worth $1,000 and you are paying $5 per click.
Your 15% click through rate ad will need 100 clicks to get a sale, making your CPA $500.
Your 4% click through rate ad will need 10 clicks to get a sale, making your CPA $50.
If you were only measuring click rates, you’d think you hit a home run the 15% ad, when in reality you struck out.
What are you waiting for? Time to change how you measure your marketing.