Build a Bigger List With Basic Math

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 psychology it’s just as 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.

For the simple reason that …

Your ability to generate massive amounts of new customers is directly determined by your ability to do simple arithmetic.

Let’s look at this in terms of return on investment. For this example we’ll use a simplistic online new customer acquisition banner ad campaign that looks like this:

Prospects see the banner ad and click on it. This takes them to 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 breaks 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 x 250% ROI = $7,500. 300 new subscribers generated at a profit of $15 each.
• Site #2: $3,000 X 100% ROI = $3,000. 300 new subscribers generated for $0 each – they’re FREE!
• Site #3: $3,000 x 50% ROI = $1,500. 300 new subscribers generated for a cost of $5 each.
• Site #4: $3,000 x 25% ROI = $750. 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 … 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 their 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 1% = 12 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 .5% = 6 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:

• 12,000 names at an initial $750 profit
• At 30 days, your profit is $4350: 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: 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 more products you the more opportunites your customers have to deepen their relationship with you.

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.

Obviously, all of these numbers are just examples.

One thing that surprise many markets is the fact that customers you get from different sources will behave differently.

• Customer you get from different types of media will buy differently: You might find that a customer who comes to you through pay-per-click spends three times as much a customer who comes to you through co-registration.
• Customers you get from different locations within the same media will buy differently: Customers generated with the same copy from two different websites may have two dramatically different purchasing patterns. So one traffic source is fundamentally more profitable than the other within the same media.
• Customers you get from different promotions will buy differently. That first promotion is your first impression and the first product delivery is your first date with the customer. Changes to that experience will create different buying behaviors.

By staying on top of these variations in your business 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 business 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.

Yours for faster success,
John Newtson