How to Calculate Your Conversion Rates
This blog post is the third in a series that explores the idea of buying customers.
In our last post, we discussed two key components to buying customers: acquisition costs and the idea of profit per customer.
Today, we’ll examine how to measure your marketing, qualify your leads, and calculate your conversion rates. These numbers are key drivers to your bottom-line.
How Do You Measure Your Marketing?
As a business owner, you may have a well-defined marketing budget. You know your advertising costs, but do you know the return on each campaign?
Often, businesses make the mistake of dividing their costs by total leads rather than by total paying customers.
It’s easy to figure out how many inquiries you received from an ad, but it’s harder to determine how many people actually bought. This can be a pain point for businesses trying to assess whether a campaign is profitable or not.
If you aren’t sure why some campaigns are successful and others are not, qualify your leads.
Qualify Your Leads
Once you begin testing and measuring your ads, you may learn that campaigns and ads you thought were really effective actually resulted in only a few paying clients. This is a result of having few qualifiers in your ad.
Think of your campaign and ad as the first step in a qualifying process. For example, using the call to action “Call for your free trial” will generate more callers/leads than leading with “Call to buy now.”
To filter out those who are not serious about doing business with you, ask people to make a small commitment in your ads. For instance, adding a small shipping and handling fee for the “free trial” will help you qualify whether someone is serious about buying.
Conversion Rates
Once you’ve generated leads, you can then calculate your conversion rate.
Conversion rate is the total number of people who bought from you out of your total number of leads.
It is one of the five ways to increase profits.
Conversion rates and customer acquisition costs are closely related. The more you turn leads into customers, the lower your acquisition costs will be.
Therefore, conversion rates should be a huge focus of your business.
Take the following steps to properly calculate your conversion rate:
- Pick a starting date and ending date of a marketing campaign.
- Take the total sales you made during the campaign.
- Divide it by the number of leads.
- Multiply it by 100.
Conversion Rate (%) = Total Sales in Period / Number of Leads x 100
Here’s an example to illustrate:
A marketing campaign starts on June 1 and ends on June 30. During that time, the campaign produced 7,000 inquiries (leads) and 1,500 sales were made. Based on the equation, the conversion rate is 21 percent.
Conversion Rate:
1,500 Sales / 7,000 Leads x 100 = 21 percent
Often, conversion rates are not fully understood. When asked what their conversion rates are, many business owners guess.
Guessing is not enough.
Conversion rates help businesses figure out what is working well and what isn’t.
Let’s say your business runs two campaigns.
During the first campaign, your company hands out flyers to people walking on the street. The campaign generates 2,000 leads over a two-week period, but just 50 of those leads actually buy.
50 Sales / 2,000 Leads x 100 = 2.5 percent conversion rate
With such a low conversion rate, you might wonder what went wrong?
Was the offer not enticing?
Was the target audience off?
In the second campaign, your business runs a Facebook ad for two weeks. It generates just 500 leads, but 150 of them buy from the ads.
150 Sales / 500 Leads x 100 = 30 percent conversion rate
Why was the second campaign more successful than the first?
Based on the results, businesses can determine which marketing works best for them.
What Is Your Cost per Lead?
One of the most expensive areas of a business is lead generation. Therefore, it’s important to keep your cost per lead within the range of your allowable acquisition cost.
To calculate the cost per lead, take the cost of the marketing campaign and divide it by the total number of leads.
Cost of Campaign / Total Leads = Cost per Lead
For instance, let’s say your business spends $5,000 on a marketing campaign and it produces 100 leads. It costs you $50 to bring in a lead.
$5,000 / 100 Leads = $50/Lead
What Is Your Cost per Sale?
Going off the same example and equation, if, of those 100 leads, you made 50 sales, the cost of that campaign per sale is $100.
Cost of Campaign / Total Sales = Cost per Sale
$5,000 / 50 Sales = $100/Sale
Many factors contribute to cost per sale, including overhead costs, cost per lead, and the amount you spend to buy your customers.
Once you list out each resource you expend in your business and then divide it by each sale, you’ll be able to calculate your break-even point and profit.
Another number to track when running campaigns is the average amount customers spend at your business.
Say you invest $3,000 in a campaign over a three-month period. During this time, you gain 100 new leads and 60 new customers.
The average amount each new customer spent with you on each sale was $100.
Cost per Lead: $3,000 / 100 Leads = $30/Lead
Cost per Sale: $3,000 / 60 Sales = $50/Sale
Based on these figures, you determine that it costs you $30 to bring in each lead and $50 to buy each customer.
Since you know each customer spent on average $100, you profited $50 on each new customer.
This information is so powerful because you are now able to control and adjust your pricing accordingly.
Know Your Numbers
All of your expenses need to be taken into consideration when you implement a new marketing campaign. Your fixed and variable costs should be factored into your cost per lead and cost per sale to get an accurate idea of how much you are investing in your business over a given time.
Mark Phelps
Mark Phelps is a Certified ActionCOACH with a passion for business excellence and life fulfillment. His goal is to help create world abundance through business re-education.
