How to Be Profitable: Know Your Numbers

The following is adapted from Business Growth Do’s and Absolute Don’ts by Carolyn Lowe.

A company that makes natural deodorant and body-care products came to our agency for help with running Facebook and Instagram ads. We started, as we always do, by asking these crucial questions:

• What’s the value of your average order?
• How often is each customer repurchasing?

They didn’t know the answers. Seriously? Well, how about this one?

• What’s your customer’s lifetime value?

They didn’t know that one, either. They had been in business three or four years by then, yet they didn’t know their basic business numbers. So they didn’t know how much they could spend to acquire each new customer, which is kind of horrifying.

It’s not as though they had been failing. They had been doing OK, with a few million dollars in revenue. They had found a lot of success through word-of-mouth by bloggers in the natural products space. They were also doing OK with their ads, spending a couple thousand a month.

But because the natural-product space is a finite universe, that amount was about a third of what they needed to spend to be able to scale revenue. They needed to go more mass-market and compete not just with products like Tom’s of Maine, but also with ones like Dove and Secret — whose customers don’t read blogs about natural products.

But since the beginning, the brand didn’t know their numbers, which meant they’d been slowing their growth by thinking short term and not investing enough in their customers.

The Wake-Up Call

When I explained this truth, the client was stunned. The first thing they wanted to know was, “How can we find these numbers?” I told them, “The data is all in front of you; it’s knowable.” It’s all sitting in the eCommerce database.

I went in and pulled their numbers, including their average transaction value and average time to repurchase. Their customers normally spend $25 each time, and the product lasts about ninety days, so that’s about $100 a year in orders per customer. That meant they could spend up to $20 to acquire each customer, and anything less than that would amount to greater profit.

They were spending $2,000 a month, which translated to $10–12 in customer acquisition cost. With a monthly spend that small (both in this case and in general), Facebook has a hard time finding enough people to serve up the ads to. It takes input to be able to generate output, and with $2,000 a month, the platforms don’t have enough data to work with.

Doing some back-of-the-envelope math based on those numbers, I could tell them how much they needed to spend each month to gain enough volume to lower the cost of acquiring each customer.

We ran Facebook and Instagram ads for them that tripled their monthly spend — thus giving Facebook enough to work with — and got the amount to acquire each customer down to $8. That means they were profitable on that very first transaction, not only on all future ones.

Know Your Business Numbers

Of course, these clients would have been a lot more profitable if they had known their numbers a lot earlier in the life of their business. So, here’s my advice to the business owners out there:

Don’t make this mistake. Know your numbers, so you can know whether you’re profitable, and so you can scale. If you’re a new brand, I understand that it’s hard to know them.

But as I did with the deodorant brand, you can still guesstimate based on the price of your product and how often you can expect customers to buy from you.

You’ll arrive at other numbers you need to know by finding out the numbers that make up your profitability equation, including those three main numbers: lifetime value (LTV), average order value (AOV), and average days to repurchase.

The first two numbers show you what you can pay to acquire customers. Knowing that third number — how often customers will purchase from you — helps you mine your relationships with your existing customers, rather than overlooking them as you chase new ones.

For more advice on scaling your company, you can find Business Growth Do’s and Absolute Don’ts on Amazon.

In 2015, Carolyn Lowe founded ROI Swift with the goal of helping emerging consumer brands maximize their growth through paid marketing and advertising. Following this approach, ROI Swift has helped hundreds of new companies increase revenue to the million-dollar mark within months. Carolyn is a mentor for consumer products accelerator SKU, a board member for the Make-A-Wish Foundation, and a member of the Beam Angel Network, the first Texas-based angel network for women-founded companies. She’s married with two children and lives in Austin, Texas.