This math is so simple but so important. Learn it and know it.
Have a good business!
Welcome to the Custom Apparel Startups podcast, your best source for information, news, tips and tricks to get you off the ground running, and earn success with your custom apparel decorating business. So, get ready to soak up some knowledge!
Now, here are your hosts, Mark and Marc!
Mark S: Hey, everyone! Welcome to episode 18 of the Custom Apparel Startups podcast. My name is Mark Stephenson.
Marc V: And I am Marc Vila. Today, we’re talking about Know Your Numbers, Part Two – The Theory of Buying Customers.
Mark S: Or Part Deux, depending on if you’re in Louisiana or Montreal or someplace, listening to us. By the way, episode 18, that means the CAS podcast can now vote! I wonder who they’ll vote for. Not the right podcast for that conversation.
Marc V: Always an entertaining time with you, Mark Stephenson.
Mark S: Thanks. I appreciate that.
Marc V: I’m going to have some more coffee after that.
Mark S: This is an important podcast. Not that they’re not all important, but in the last one, in episode 17, we really talked about how important it was to calculate the value of a customer; the value of a customer for this sale, and their potential for going forward.
But that doesn’t mean a lot, if you spent too much to acquire that customer.
Marc V: That’s exactly true. What’s particularly interesting about it for me, is that some folks don’t want to spend any money on their marketing or growth. They don’t want to buy customers, per se, using that term, because they don’t have the money for it, or they don’t appear to have the money for it.
However, if you do your math, then you do. Not only do you, but you make more money.
Mark S: Frequently, it’s not that they don’t have the money. It’s that they don’t have the money for that. They’ll have the money for a lot of other things, like maybe trying something else new or buying some new doodad, or spending two days hunting in Alachua County, but they don’t have the money to invest in marketing.
A lot of times, it’s because they don’t know if it’s worth it.
Marc V: Yeah, or you hear the stories. “I went to this event. It cost me $1,500. I walked away with $200, and it cost me $20 to eat lunch.”
Mark S: That’s right.
Marc V: And then, I think there is another side of it, of folks who are always throwing money into the marketing, not paying attention to the numbers, and end up crashing and burning at some point in time.
Mark S: Right, and that’s more often. The theory of buying customers is really to really think about your customers just like that, in cost of acquisition.
For example, if you go to a marketing event, whether it’s a fair or a show or something like that, you have a fixed cost. How much did it cost to rent the table? How much was my time involved in getting ready for the show, and participating in the show? How many customers did I get? How much money did I make?
That’s simple math. You’re going to know, I spent $1,000 on it, and at the end, I made $2,000 on it. There’s some things in between, but it’s kind of that simple.
Marc V: Yeah. That was essentially worth the time. But how do you know? How do you know if it’s going to be worth the time? That’s a tricky part, and I think the hardest part about spending any money on trying to get new customers.
Mark S: Or spending any time, because a lot of people, they won’t even realize that they’re marketing, when they hop in the car and drive around and hand out business cards. So, they won’t ascribe a cost to it, and they don’t keep track of the business that resulted from that.
Marc V: I think that maybe we could start doing a little bit of math here, and kind of break it down a little bit, if you’ve got some to share with us.
Mark S: I have a little bit, because I actually use these kind of calculations in my daily life, as a marketing guy. I’m pulling my sleeves down, I’m fixing my collar, as I say “marketing guy.”
Let’s use the driving around example, because that’s the easiest one. Let’s figure out the cost of what it costs you to hop in the car with a trunk full of samples and business cards, and maybe a couple of brochures, and go knock on doors and introduce yourself to businesses in the area, and see if you can’t get some business.
Marc V: It’s going to cost you – you’ve got the gas.
Mark S: Right. Let’s make up a number here. Let’s say that the gas is $50.
Marc V: Sure. That’s a good trip day. That’s a good day. You’ve put a lot of miles in.
Mark S: How much do you pay yourself for that day? Because labor has to be a part, even if it’s just you, of every calculation.
Marc V: That is really a good point. You should factor that in, especially for growth. Because what you might hope is to say that one day, it would be cool to pay somebody to do that.
Mark S: And if you don’t assign some kind of a labor value to your time, then what you’re going to find is that by the time you’re ready to hand it off, or you think you’re ready to hand it off to somebody, you realize there is no money there to pay them, because you never worked that into the cost of your business.
Marc V: One thing you could do is just say “If I were to hire somebody, how much would I have to pay them an hour, or commissions, or whatever it might be?” Even if you rough estimate it.
Mark S: Which I’m going to do right now. Keep in mind that this may seem like a huge amount of money in some parts of the country, and be ridiculously cheap in others. This is just regional. Hiring somebody to go knock on doors in Manhattan is a little bit more expensive than hiring somebody to do that in Tampa, Florida. So, let’s say $20 an hour.
At $20 an hour, somebody is going to drive around for seven hours. That’s $140. So, you’ve got $50 for the gas and $140 for the labor. Is there any other cost?
Marc V: Well, you’ve got just actual hard copy goods you might be sharing, whether that might be samples, business cards, brochures. Anything that costs you to make.
Mark S: Business cards and brochures are pretty inexpensive, so let’s just say that that’s going to be $10. We’ll use $10. Then, for samples, you’re going to give away maybe ten shirts. This is an expensive trip. We’re doing this right.
Marc V: We’re going full out.
Mark S: Ten shirts, and the cost is going to be $5 a shirt.
Marc V: That’s a pretty good number. I like that.
Mark S: Okay, so that’s another $50. Wow! That day cost you $250, to drive around. Now, think about that for a second. I want everybody to soak that in, because you may have thought that you throwing a couple things in the back of your car and driving around for the day was free. But it’s actually costing you about $250.
So, your marketing cost for the day is $250. How many people do you think you can go by and see? I’m not talking about a pro that knocks on doors for a living, but just a business owner that’s going to strip malls and seeing if they can’t generate some business.
Marc V: Based on the gas that you said there, I’m figuring that you’re driving over 300 miles.
Mark S: Wow! Did I mention -?
Marc V: Oh, it’s a Hummer?
Mark S: It’s a Hummer, it’s a dually.
Marc V: So, it’s 150 miles. But realistically, you should be able to hit a real number, between 25 and 50 places in a day, I think.
Mark S: That seems like a lot, so let’s go with 25.
Marc V: What do you think?
Mark S: I usually get tired after the fourth one, and then I go to lunch, and then I have to stop at Starbucks and check my email.
Marc V: When I was in outside sales, our goal was we had to get 25 contacts/business cards a day, when we would go out. That was our eight hour day. You had to find 25. Now, some of those prospects, the point behind the 25 number is probably half of those prospects weren’t very good prospects, but it was a number. It was part of playing the numbers game.
Mark S: And that’s important here.
Marc V: Yeah. It was an accounting firm, and it was just the owner and a secretary, and that’s it. Now, is that a great apparel prospect? Probably not a lot of money. However, I’ll take their card, if they would let me. And they became in my database, because you never know.
Mark S: I just want to point out here that we’re not going to spend this whole podcast talking about knocking on doors. Don’t be afraid, if this is not one of your things. We’re just using this as a an example.
Marc V: Yeah, just an example, and we’ll probably drop another example after this. I think that would be a good idea.
Mark S: Let’s say that you were able to see 25 people and get their contact information, because that’s really important. That means you spent $250, you got 25 leads or sign-ups. That’s $10 a lead. That customer cost isn’t there yet, because you don’t have any customers.
How much do you think you could sell? You’ve spent more time in the apparel business than I have. If you went and you saw 25 people, give me an idea.
Marc V: Get people to say that within a short period of time, they will sign up and buy apparel?
Mark S: Yeah.
Marc V: A couple.
Mark S: Okay, so three?
Marc V: Yeah.
Mark S: Okay, so let’s say you get three sales. and an average sale is probably going to be $20 a shirt. Let’s call it 14 shirts, $280.
Marc V: Okay. That’s a good place to start.
Mark S: That’s $280 times three. I’m doing math here. That is an $840 day. Subtract that from your marketing costs. You made $590! That’s not too bad.
Marc V: That’s not bad for revenue, at all. And really, if you factor out all of your other costs behind that, it’s still a profitable day. In the end, after paying your employee, – you – buying the shirts, running your equipment, paying for the marketing, doing all of that stuff. If you take all of that math out, your business will have profited at the end of the day, meaning that there’s money in the bank, beyond paying you $20 an hour to do that work.
Mark S: Right. Now, here are the two important calculations. That’s how much does a lead cost, so how much is it to acquire a potential customer? And then, how much does a customer cost?
Let’s say that, once again, the marketing cost was $250. So, we are going to take three sales, $250, divided by three. $83 to get a customer.
Marc V: We spent $250. We got three customers. For each customer that we got that day, it cost us $83.
Mark S: Yes.
Marc V: Now, this is a great time where you say “But how much was that sale for each of those customers?”
Mark S: Right. The average sale was $280.
Marc V: Then you start thinking “By the time I take the cost of my shirts, was it worth doing that?” This is where we go back to the value of the customer, and we do that math.
Mark S: I feel the need to say this one more time, because I imagine people are driving in their car, going “What the hell are they talking about?”
What we’ve figured out was that the cost of driving around for the day, in time and gas, etc., was about $250. You would put in your own number here. I have no idea what your costs are. Then, if you spend the day doing that, you could probably get 25 leads or potential customers.
That means that the cost of each one of those potential customers cost you $10 to get. That’s kind of one calculation, is how much does it cost for you to get a lead? The other calculation is how much does it cost to get a customer?
If we sold three customers out of that – we drove around the day and we got three customers. The average sale was $280. That means you made $840 for the day. You subtract the marketing cost, and what you get is a net $590 profit day, or sales day.
Marc V: Sales day or revenue day. Another thing to consider with not just this example, but all of them, is that everything has got a long term value to it.
Mark S: Right.
Marc V: You got 25 leads. You closed 10% of them, roughly. However, you’ve still got 20 or so people that gave you their card or said “I might need shirts maybe one day, possibly,” that might need them again in the future.
So, it’s one of these things where there’s always a long term gain on all of this.
Mark S: See episode 17 of the CAS podcasts, where we talked about the initial value of a customer, and then what that might mean for your business down the road.
Marc V: Yeah. We’ve got this initial cost that it costs to get each individual customer, how much we profited out of that deal, and we said that at the end, we actually made money. But going back to the previous episode, we’re going to take that math and expand it over time, and realize “Wow! I didn’t just make $150 profit today. I’ve earned myself $7,000 to $10,000 of profit over the course of a three year period.”
Mark S: Right. One thing we were talking about before the podcast was to remind everybody that when you do those initial value calculations from episode 17, that there’s no guarantee for the longevity of the customer. So, you should do these calculations and you should know them, but it’s going to take you a while to work out the average longevity of a particular kind of customer, etc., to get those good long term numbers.
But you’ve got to start somewhere. When you start with knowing the value or the cost per customer, the initial value of the order, then you’ve got a pretty bright future, because you’re watching your numbers.
Marc V: That last little bit you said was just what I was thinking about. When you’re watching your numbers, then you can start allowing statistics to take care of themselves, probabilities to take care of themselves. Flipping a coin right now, we could flip it tails, three times in a row.
Mark S: It could happen.
Marc V: The probability theory is that as long as I keep flipping into infinity, it’s going to get closer and closer to 50-50. The same thing with your averages. If you continue to calculate these averages and continue to get better at calculating them, you can say “This one customer that I got is a $5,000 long term potential.”
They might be worth nothing more than that sale, but again, it’s an average over time, that you have to keep saying that. You have to keep fighting the fight. You have to keep working out.
Mark S: Yeah. It’s something that once you get the block and tackle, the nuts and bolts kind of thing of what to do every day, then it will pay off down the road.
One of the things that really gets me excited, as a marketing guy, about knowing that cost per customer and how you got there, is just for the driving around example alone, for example, let’s say that you’re driving around, and your cost is $250. You got 25 names and email addresses. You got 25 leads or potential customers.
Let’s say you get a little bit better at that. Let’s say you work up that if you wear a different kind of t-shirt or you say something different, or you bring a different kind of sample, or you figure out that it’s a good idea to go into a big building instead of a bunch of small buildings. What if you can change that number from 25 to 30?
Then, all of the other numbers change, because now you’re spending the same amount of time and the same amount of cost, but your cost per that customer acquisition goes down. You can see five more people, so maybe the number of sales in a week goes up. Your costs stay the same, but because you are better at one thing, then it has an exponential impact on the business.
Marc V: That’s what’s great, is you can pick any of these things across the board and try to adjust it, and if you improve, then all of the numbers improve with it. So, you could also say the average sale was $280. You could say “If I can get better at increasing my average sale by 10%,” which is about $20 or so more dollars, then across the whole thing, you’ve made that much more money.
Mark S: Yeah. If you increase your average sale by $30, and you went from three sales to four sales a day, now that’s another $120 of initial value in the same time, at the same cost.
Marc V: Exactly. You can improve these little things, but not everybody is going to want to drive around.
Mark S: Right. That’s why I like that cost per customer number, because it may even give you an excuse not to drive around.
Marc V: Yeah.
Mark S: You’re got that seven or eight hour day. What other marketing activities could you spend money on, spend that $250 or so on, that we could apply this calculation to, Marc?
Marc V: We could turn around and say what about some sort of local advertising?
Mark S: Okay, so like a newspaper ad or a magazine ad or a newsletter ad?
Marc V: Yeah. Like I have a community newsletter that I know it goes out to something like 10,000 homes within my zip code or so. I see all types of little ads in there. There’s usually three or four plastic surgery type of places.
Mark S: Where do you live? I don’t know!
Marc V: There’s a bunch of pizza and Chinese food, and a Karate place. The very typical things that you see in the community ad. I think that an apparel thing could work in there.
Mark S: It could. It might not. It might completely bomb, or it might be awesome.
Marc V: Yeah. But that is something that you could do.
Mark S: Right.
Marc V: It’s something you can try out, and see if it works. So, how could we start doing a little bit of math on that, maybe?
Mark S: The first thing you would have to do is figure out how much the ad costs. I think that $250 is actually pretty reasonable.
Marc V: Yeah. I remember a friend of mine looked at it once before, and I think this one in particular was around $500 for a little corner ad. But also, that $500 went out to like 10,000 homes or something like that. So, it costs a little bit more, but you have a farther reach.
Mark S: Let’s say it’s $500, then. The important thing about doing one of these ads, especially, is it’s worthless if you don’t have a way to track the results. I mean, if you do an ad this month, and next month your sales go up, unless you have some way to know that it came from that ad, you’ll have no idea. You won’t remember, “Is November usually a really good month for me? Did something else happen, that boosted my sales?” Or really, was it because of the ad?
Marc V: Did I spend three months driving around in the car, and then say “I’m getting tired. This isn’t working for me. I’m going to post an ad.”? The next month, you made a ton of money. Well, was all of your money from -?
Mark S: It’s probably from driving around.
Marc V: You’ve got to figure that out. I’m sure we will do a whole podcast on tracking these things. But you could offer a specific product code.
Mark S: Yeah, a coupon code.
Marc V: Or send people to a certain phone number or a certain email address or a certain website.
Mark S: All of that stuff is possible, and not difficult, and not very expensive to do.
Marc V: Exactly. You’ve got to track that, and make sure that again, if you spent $500, how many people called you or went to the website?
Mark S: Which would be leads or signups. How many people gave you their information? How many potential customers introduced themselves to your business? I really don’t even have a number for this. I don’t have a way to estimate.
Marc V: No, but if I’m going to be real, I think it’s going to be maybe five.
Mark S: Okay, five. You are even more Pollyanna about this kind of advertising than I am. If it’s five, that means that it cost you $100 a lead, or $100 per potential customer.
Marc V: Yeah. Now, I would say though, because they’re coming to you, the close rate is probably going to be particularly high.
Mark S: Right. Let’s say you make three sales.
Marc V: I would say so, because they came to you. They said “Oh, we do need shirts for this event. This is a shirt company right here, and they’ve got a little 5% off coupon. Sounds awesome! I’m going to give them a call.”
Mark S: Yeah. So, let’s say that everything is the same as our driving around for the day example, just to keep the numbers easy. Let’s say the average sale is $280. It’s family reunion shirts, or something along those lines. We spent $500. We got five customers introducing themselves to us. That means we spent $100 for each lead.
The sales were $840, because we had an average sale of $280. We made three sales, so our net profit was $340, and it cost us $166.67 per customer.
Marc V: Now, this is the scenario where I would start questioning “Should I do this again?”
Mark S: Right, because we just saw that the cost to buy a customer with the previous method of driving around, our estimate was about $83.
Marc V: And by the time you factor in the cost of your apparel and all of these other things, you’re probably pretty close to zero. So then, what you do in this scenario is a whole thing to consider.
Mark S: You have a couple of choices. You could really believe in this method of advertising, for some reason, and you could work on that cost. You could try to cut a better deal for the ad, on the front end, by calling the company and saying “It’s just not working that well. Can you do something better for me on the ad cost?”
You could try changing your ad, and running a couple of different versions, and seeing if that impacts it. You could try answering the phone differently. You’re still back at that same spot, with “What happens if I increase the average sale a little bit, by asking that question about caps, or things like that? What if I get a better landing page, or answer the phone better, or offer a better price?”
You could decide to kind of mess with each one of those variables, or you could say “You know what? It’s already twice as expensive as driving around. Forget it,” and move on.
Marc V: Also, we could completely flip both of these scenarios. I don’t think this is a case for driving around.
Mark S: No, no. These aren’t real case studies.
Marc V: Because you could have the flip. This local ad in your local paper could be, if you sign up for a year, it’s only $150 a month.
Mark S: Absolutely.
Marc V: Now, you’re getting five customers for every ad. Well, it’s like “This is a no-brainer! I do nothing. I did one piece of work, and they bill my credit card $100 and some a month. But I know that every month, I’m making $500 or $800 in sales from it.”
Mark S: That’s the attraction of that kind of place an ad thing, because your labor is no longer involved. You don’t have to do that calculation. Oftentimes, there’s actually an opportunity value to running an ad versus driving around, because now you’ve got six or seven hours that you could do other things.
Marc V: Exactly, so there’s a case for all of this. But the point of it all is just to start knowing these numbers, and paying attention to it, so you can say “Driving around is not worth it,” or “Advertising in this local paper is or is not worth it.”
Mark S: You’re going to have to try these things. You’re going to have to invest in experimenting, and you’re going to have to make stuff up. You’re going to have to estimate. Join the Custom Apparel Startups Facebook group, and ask other people, “How much does it cost you to do a local show?”
We’re talking to a customer kind of offline right now, who did that. She is doing her first kind of market or fair, and she’s got some baby embroidery stuff. It’s “How much is this going to cost me? How much does the time take? How much can I sell it for?”
So in the end, after the event, she can figure out “Was it a profitable thing, that I want to do again?”
Marc V: What’s great about it is, you had mentioned about the labor cost in there and paying yourself. This is what is important about it, and scary in the number about it. If you do this, and you say “I’m going to pay myself $20 an hour,” or whatever number you’re going to pay yourself, or you’re going to figure out what your cost is.
At the end, that final number of profit per shirt might be $1, and you’re going to say “What kind of a business am I in? $1?” But don’t forget -.
Mark S: You’re paying yourself!
Marc V: You also paid yourself a salary or an hourly wage. Then, in the end, you put some money in the bank, outside of your paycheck, which is really cool about it.
Mark S: I don’t think I’ve done one of my pet peeve or high horse things in a long time.
Marc V: You’ve done it a lot!
Mark S: Thanks! The point behind a business, technically, is to generate profit.
Marc V: Okay.
Mark S: Profit is the number that you put in the bank at the end of the month, after you pay everything off, and that includes your salary. If you find yourself with no money in the bank, or you’re going into your personal account, or you’re just using 100% of the money to kind of add to your family income, you’re not really in business. You’re in kind of a hobby that is self-sufficient.
So, that dollar that Marc just mentioned is nothing to sneeze at. It’s a big deal, because even Amazon, for the first decade it was around, didn’t do that. They didn’t put any money in the bank, at the end of the month. So, profit is a big deal. I don’t want to gloss over that.
Marc V: I’m glad that you bring that up again, because it’s two things that are not thought about enough; paying yourself and putting it aside for the bank.
Mark S: I think we should beat these scenarios to death, because I’ve got a couple of others. I actually have a thought, and I’m going to lose it if we go into another example. The thought is that on that driving around scenario, or the ad scenario, you can’t let one day, one set of data define the success.
Because that first day, you might go out and make a $3,000 sale, and then you’re going to say “I’m going to do this every day, because it’s fantastic!,” and then get discouraged, because that doesn’t happen again. Or you might do it for a bunch of days, and you’re saying “Every time I go out, I’m making $100. Do I want to spend the money somewhere else?”
But you’ve got to do it over time a little, because you’ll find that, again, you’re going to get customers you didn’t sell right away, that will come from ads and from going out. Also, the fact that you’re going to have better days than others. You’re going to go out or do whatever you do, run an ad or go out and do something, and get nothing. Then, you’re going to get another one and you’re going to blow the numbers out of the water. You’re going to make ten sales in a day.
Mark S: Exactly right. That kind of reminds me of this sales story that I read about at one time, about a guy that went to work for a hardware company. He was a new guy, and everyone else was doing really well. They were making a lot of money.
Literally, for the first year or 14 months, the guy did not make a single sale. They thought he was going to get fired or leave. Month 15, he got a contract with Home Depot. That’s what he had been working the entire time toward.
His numbers looked terrible, until he closed that deal with Home Depot, and he spent the next ten years as the top salesperson, because all he did was service that one account.
That’s just kind of a story to reinforce what Marc said. You can’t take what you’re doing today. At some point, you’ve got to average things out, but you can’t take the one day, the first day, the one show that you do, that one fair that you do, the one day driving around, or the one ad, and make all of your assumptions from it.
Marc V: Yeah. A story like that is fantastic, but also, it’s not a lesson that you should go for the big sale.
Mark S: No! Because you’ve got to feed the baby for that 14 months! You’ve got to do something.
Example number three is doing an event. A lot of our customers, some of our customers, this is all that they do. They go from fair to fair or from art show or trade show to trade show, and sell rhinestone transfers or ProSpangle transfers. Those are very popular to do that with. Or bling tees at cheer competitions, or any number of examples.
Marc V: I’ll tell you, these local farmers market community type of things are getting really trendy and cool.
Mark S: Yeah. A lot of people with beards and wax-tipped mustaches. It’s very strange for me.
Marc V: Somebody there is going to be making some sort of organic dog treats.
Mark S: Absolutely!
Marc V: This is just a little plug for this thing. If you have some of those local, you’ve got to check it out and see if there’s an apparel decorator there, and if you think it’s profitable to be there, because events like these are not quite fully tapped out yet.
Mark S: Let’s talk about the R value for this stuff at the end, because I think that’s a big deal, especially when you pick these events. The great thing about an event, whatever it is, is you can do the math in advance, again, on what the cost is going to be. Because you’re going to spend money on a 10 by 10 booth, or a table or a tent, and you’re going to know exactly what that is.
It can range anywhere from $100 to $10,000. I think probably an average is about $1,000. Is that fair? Does that seem good, or is that a little high?
Marc V: It really depends on what we’re talking about. I don’t believe that a local farmers market -.
Mark S: It’s not going to be $1,000. You’re right.
Marc V: However, if it’s a massive community event, where they’re expecting 10,000 people, or a particular trade show or something like that, you could spend $1,000.
Mark S: I think it would almost be worth – not quite worth putting this podcast on pause, while you look something up online, but you should find out. If you’re a horse enthusiast or you go to dog shows, or just there’s local farmers markets that you know about, find out specifically what that cost is.
Marc V: Yeah. You can also build up to them, as well. You could say “Let me try the farmers market thing. Let me see what works, what I want to do, how customers react to things, because I’m planning this big equestrian event that happens in the spring of 2016.”
Mark S: Good point.
Marc V: You can start to build up to these things, just like anything else that you do. The first ad might not be the most expensive ad in town, and the first event might just be a small event. But you get into these things, and you do the numbers on them.
Mark S: Here’s the great thing about doing any event. It gives you the opportunity not just to sell on the spot, but to build up your database, to introduce yourself to those potential customers. If I spend $400 on a table at a local market or whatever it is, I may meet 150-200 people that come by the booth. Maybe none of them buy something, but 100 of them sign up on my little sign-up sheet, because they want to know when I’m going to have a sale again.
So then, now you’ve got a great cost per lead. It cost you $400 to do it. You get 200 people to sign up on your sheet. That’s $2 a lead, or $2 for a potential customer.
Marc V: That’s where, again, the numbers start getting really great. You mentioned about the R value, which hopefully you’ve listened to the previous podcast to this. This is the value of referral business and growth from those initial customers.
Mark S: Right.
Marc V: That’s where you can start adding this in. It works for all of the equations, but especially in events. If now is a good time to get into it, a little bit?
Mark S: I think so. I’ll tell you what. Let’s just finish off the math for the event, and then we’ll talk about the R value.
Marc V: Yeah.
Mark S: The idea, again, just like we did with the other examples of driving around and placing an ad, if you do an event, you’re going to have a specific cost. Maybe it’s $400 ,and maybe you get, even if it’s just 100 people that sign up on your sheet, now you’re spending $4 per potential customer or lead. You put those in the database. We’ll also talk in a little bit, about why that’s valuable, just putting them into the database.
You’re going to make the same kind of sales. You can do the math from here, yourself. If 20 people buy $20 worth of stuff, you just made your $400 back. You made your $400 back, and your cost per customer is basically $1.
Marc V: Yes.
Mark S: Now you can see, “Do I want to spend $1, to buy a customer? Or do I want to spend $83 to buy a customer? Or do I want to spend $166 to buy a customer?” Then, you take all that, and you put it back into your initial value spreadsheet, and you figure out if it’s worth it.
Marc V: Time factors into all of this. Not always, but oftentimes, the less time that you have to spend to get a customer, the more it costs.
Mark S: That’s a good point. We left the time out of our calculation for the trade show or the market. It’s going to take you basically a total of a day to get ready, and a day to do it. So, that’s 16 hours at $20 an hour. That’s significant. What is that? $320.
Marc V: That sounds about right.
Mark S: So now, your cost of the show is actually $720. That’s a good catch. You’ve got to figure out your labor, not just the cost of the booth and the table, and getting set up, and the cost of preparing for it, and the cost of tearing it down, and what happens afterwards.
Marc V: And there’s plenty of initial investment cost that you’re going to say over time. “Do I have to buy a tent? How much is that going to cost me? How many events am I going to do with this?” There’s a lot of little things to consider and look at with it.
But in the end now, when we started doing that math, it might have turned out that you broke even on that event.
Mark S: Right.
Marc V: So, do you go?
Mark S: Well, that depends on your evaluation, and on what you think is going to happen because you went to that show.
Marc V: Yeah. That’s where we talk about that referral value, the R value, or the long term value of these potential customers. This is where you just have to use some intuition, in the beginning. Eventually, you’re going to have a bunch of numbers and you’re going to know. In three years’ time, you’re going to say “Every time I go to an event, it yields to this, because I track these customers in my CRM,” which we talked about in the previous episode.
So, you’re going to know over time, but in the beginning, you’re going to have to use intuition, and guess. And keep it simple. Again, don’t get so caught up in trying to figure things out and knowing details and guessing, and fear comes into play and all of these things, that we decide not to do anything, because it’s easier than being worried about it.
Mark S: It’s easier just to stare at the phone and hope that it rings. It really is.
Marc V: What I mean by using your intuition on this event is to say “Okay, I’m going to go to a local farmers market. Based on the previous time I went, I broke even. However, I met 100 people, and I know I had at least five really good conversations.”
Mark S: Right.
Marc V: One gentleman is on the School Board, and he talked about possibly doing shirts next year. They need another company to bid. You met a firefighter, and he thought your shirts were so cool. He said “We do all these charity events all the time. We do these things. We’re always tearing up t-shirts.”
So, you start thinking about the people you met. Your referral value and your long term customer value is probably high on that event. You might say “You know what? Every time I go, I break even. However, I get a lot of really good leads, and I mean contacts. I would say that I’ll do this every weekend that they do it,” which is maybe once a month.
“I’m going to do this for six months, because every time I go, the R value is really high. I really feel that I’m going to get long term business out of this, and it’s worth being at zero.” Because you paid yourself, remember. You didn’t make no money.
Mark S: Right. That’s included.
Marc V: You paid yourself. You just didn’t put money in the bank.
Mark S: Let’s point something out. You’re going to be guessing, the entire career of your business, if you don’t have a way to record the customers that came to that show, and track whether or not they actually buy anything from you, or they refer anything from you. So please, listen to that episode of the CAS podcast on wasting money on marketing, because you’ve got to keep track of these people.
You have to know that this set of customer came from these kinds of shows. The other estimation is, let’s say you go to a show, and only actual farmers show up, and they live – no offense, farmers! – but you’re 500 acres from your neighbors, and you might not know that many people. You might not have a lot of opportunity to give referrals or to buy a bunch of t-shirts.
You could go to that every month or every quarter or every year, and maybe only get initial sales there, and maybe that’s break even, but the R value is almost zero. So, don’t go.
Marc V: Yeah. Don’t go.
Mark S: Because remember, there’s still that kind of economic cost of “What else could I be doing, if I wasn’t doing this show?”
Marc V: We’ve discussed in the past, doing like cheer or dance events, if you’re got rhinestone equipment, and you do those events. I think that is another example that just is perfect for this. It might cost you a good amount to go there. You might have to spend a lot on the booth. The travel costs might be high, because these might not all be local. You might live in Florida, and the event’s in Georgia, so it’s multiple days’ worth of travel.
However, if you know that you’re going to be able to service and build into your community, where you say “I’m going to meet tons of people – moms, kids, coaches, event coordinators. I’m going to get people to sign up for my email list, because I have a website where I sell these cool custom shirts, and I have a feeling that I can get people to come back and buy them.”
Then in the end, you might not have even necessarily earned money on that event. You might have even lost a little bit. However, you know that that R value is so huge, because “I’m going to see 500 people, and they’re all going to go to my website, and I’m going to get them to sign up for my email list. I’ll send them out when I have a new design and a shirt.”
The cost of that customer now, it takes a little longer to do that math, because you have to say “I did this event. Then, I’m going to send these emails, come out with these t-shirts, etc. I’m going to know really the number on that event, in say four or five months.” Great value!
If it’s an international event – let’s say that it’s that same event, but they’re coming from all over the world.
Mark S: The R value may be a little bit lower, because those people from other countries might be less likely to buy from you, and more likely to buy local.
Marc V: Yeah. Is somebody from Germany going to order a custom t-shirt from you, when your website and business is based in Tennessee?
Mark S: They might, but the potential is lower.
Marc V: The potential is lower, compared to if it’s a southeast conference, where everybody is within a day or so of shipping time from you, and they might order that stuff online, or even order their custom stuff through you.
Mark S: Right. So guys, this is what it is to run a business. If you wake up every day and all you do is print t-shirts or run your embroidery machine or make rhinestone transfers, you’re probably not going to grow your business. These are the activities that you need to try or do, in order to grow and make real profits at the end of the month.
And you have to keep track of it in between. This is actually the business of doing business in custom apparel. It’s a very important part. It’s not something that you can ignore, and be easily successful.
Marc V: I think that a lot of these podcasts, really just in general – I think all of them are just about a mindset. It’s about a business mindset that you get into, where you start trying to do math the right way. And you might not do it the right way. You might not factor in everything. You might not have a fancy Excel spreadsheet or whatever it could be.
But you get into this mindset of just going through our podcasts. You’re going to keep track of your customers. You’re going to consider how you market to them. You’re going to start doing math and numbers on what each one is worth, and how much it costs to go to events and do different types of marketing, and “What did I make from that event?”
Just get the theory behind it all, and that mindset is what makes the difference.
Mark S: You’ll understand that once you have all of this, especially I think if you’ve listened to all 18 of these episodes, or at least the ones that you think apply to you or on the basic business, then you’re just about at that point where you can actually know what it means, “If I add like one little thing to every order, if I reduce my cost to get a customer by just a little bit, if I get one more customer a week.”
All of these things that a sales or marketing person focuses on, that a small business should be focusing on, then man, you are so far ahead of the game! And you have such a higher probability of success than you did beforehand, that it makes me happy that we’re doing these.
Because in the custom apparel business, let’s face it. A lot of people get into it because they’re growing a hobby or they like doing the thing. We’ve talked about that in other podcasts. But they’re not necessarily good at doing business.
If you are like that, then you might be able to pay the mortgage, and maybe that’s all that you want. But if you really want to be successful in business, then this stuff will help.
Marc V: Know your numbers!
Mark S: Yeah, know your numbers! Your Accountant will love you, if you know your numbers!
Marc V: Yeah. I think that hopefully, we’ve put some good thoughts into this, and helped to seed out there on knowing what it costs to get that customer, knowing the theory of buying customers, what it means to invest money to get new customers, and how to know if it’s worth it or not.
Mark S: That’s really the big question. I know a lot of people out there, they do a $500 ad, and then they don’t know if it’s going to work or not. They do an event, and because they don’t keep track of the people that were at it, they never know if it’s profitable or not. They don’t see it as a reason to spend, so they don’t.
Marc V: Know the numbers, and track the history of it, what happened to it, where they came from, as best as you can.
Mark S: Actually, just listen to all of our podcasts!
Marc V: Well, if this is the first one, you should go back. I really recommend it.
Mark S: Episode 17.
Marc V: Yeah. There’s a lot of great information. If this is the first one you’re listening to, go back and learn a whole bunch more stuff, because you are part of an elite group of people that are taking the time to really grow their business, and do great at it.
Mark S: I agree, and we’re happy to have you guys as customers and as listeners to the podcast!
So, that has been our legal voting age episode, episode 18 of the Custom Apparel Startups podcast: Know Your Numbers – The Theory Behind Buying Customers.
This is Mark Stephenson.
Marc V: And I’m Marc Vila. Thanks for listening!
Mark S: Thanks, everybody!