Internet Marketing Math: The Basics You Must Know

At some point in time the following statement began to be believable to a few people…



“THE Secret Mathematical Formulas for Making a Million Dollars Online in 33 Hours, Guaranteed!”

It’s like gold fever: one person strikes it rich, and soon everyone’s trying their hand at panning in cold streams for shiny, addictive metal.  Yet, how many times have you seen someone with minimal understanding putting forth only a little effort and expecting back a lot.  It just doesn’t work that way, does it?  While “effort” cannot be addressed in this article, “understanding” can.  It is said that there are no guarantees except death and taxes, but keep reading, and you can get closer to your financial goals.

So, do you like money?  Sure you do!  Do you want to begin or already have an online business?  Yes you do, or else you would not be reading this.  Having settled these two items, here are a set of very helpful mathematical “formulas” for assisting both beginning and ongoing online business operators.

Want to really make a million dollars online?  Set this $1,000,000 as your goal, and reverse engineer the process with your product pricing and costs.  Then use these often eye-opening steps to make better judgments and decisions that will actually get you closer to that goal.  What is the best way to demonstrate this?  Simply dive in and start crunching some numbers.

These are simple examples for purposes of illustration, but your homework is to plug your own figures into these formulas and see where you stand, where you are going.  And what you are going to do about it.

Let’s Calculate How to Make $1,000,000

Want one million dollars in revenue?  Let’s see how to do that.  Here are some “beginning assumptions.”

You advertise with promoted posts on Facebook.  For every 10,000 post views, 500 people will click and see your Facebook post.  That is a “click through rate” of 5%, and is good.

Of these 500 people, 100 will click one more time and visit your website, which is already installed into your Facebook company page.  This ratio is also good.

Your hypothetical product sells for $500 and costs $50 to produce.  This leaves you a gross profit of $450 for each unit sold.

Of the 100 people who end up visiting your website, one person makes a purchase, a 1% conversion ratio.  For a $500 product, this is extraordinarily good.  You must have a needed product and persuasive advertising to be so successful.  Nice job!

So, what’s the million dollar formula?  Simple.  Reverse the figures and find out how many visitors need to be on your site and how to acquire them.

Daily site visitors required for $1 million dollars is expressed as follows:

(“desired daily income”)  ÷ (“gross profit per sale” X “conversion ratio”)

Let’s calculate these numbers for a better understanding:

$1,000,000 yearly = $2739.73 daily
$450 profit X 0.01 conversion ratio (that’s 1%) = $4.50
So…..  $2739.73 ÷ $4.50 = 609

Yes.  609 people have to visit your site daily in order for you to make a million dollars a year in revenue.  That’s a ton of impressions, and a lot of clicks.

Make Good Impressions

Let’s run the “impression” numbers next and see what happens.  Again, we will start with the desired number of visitors and “reverse” the math to see your “top line,” how many impressions you need, and if you can afford it.

Remember our “assumptions” from above?  10,000 impressions = 1 buyer.  You need 609 buyers.  That’s 6,090,000 impressions a day.  That’s a lot.  Even for Facebook.  But let’s assume it’s possible.

Remember, you have $450 to play with after each sale, but keeping $300 for new profit, overhead, emergencies, slow sales periods, and future growth, is a common minimum ratio (this will be discussed in more detail below).  That now leaves $150 per sale for advertising.

Facebook’s promoted posts run you $150 for an average of 10,000 impressions.  So, to get your 1 buyer, it will cost you $150.

Congratulations!  Your numbers work.  The last step seemed so easy, but it was so critical to success, that it needs to be highlighted.  Spending up to $150 to generate those 10,000 impressions was safely affordable.  Anything in excess was not.

Double Your Money or Walk Away

In other words: you should be willing to spend $150 to get $300, but no more.  There needs to be a safety margin for the other associated costs of business.  Double the money or get out.  Many successful online entrepreneurs will only touch a product with a 7-10 times markup, as they’ve been through the pitfalls of missed shipments, customer refunds, ad campaign errors, etc.  a 2.2 to 2.5 times markup is the bare bones minimum to hang your “For Sale” sign on.  (T. Monsoff, Entrepreneur, 2010)

What does that mean, “2.5 times markup”?  Let’s use a “per sale” example from our product above:

$500 product sale price.
$50 production cost + $150 advertising = $200 product cost.
500 ÷ 200= 2.5   (That is a 2.5 times markup.)

For safety, at a 2.5 times markup, the product should be high cost, low likelihood of customer return, and have a safe and reliable production and delivery chain, ideally with flexible credit terms with suppliers and advertisers.  Emergencies will happen.  At only 2.5x earnings, there’s little margin for error.

Honesty check

If you had this exact plan, this exact Facebook campaign, and this exact product, and the cost for 10,000 impressions was $187, would you have “just went for it”?  If you said “yes” you are not alone.  If it cost $213 would you have done it?  Most people would have.  Despite numbers that say “No!” quite blatantly.  You will be well below the 2.5x earnings safety threshold.

Most people do not understand these numbers and fail as a result.  They are tempted to try panning for gold with everybody else.  And they fail like everybody else.  90% of online startups fail within the first four months.  (Silver D., 2010)

Alternative Measures

When the “numbers don’t add up” and you are confronted by issues in advertising costs, there are alternatives.  If Facebook becomes unaffordable, what about e-zine ads, blogging, or even niche marketing?  You won’t get your 6 million impressions with niche advertising, but even 600,000 will still get you $100k in income.  Not too bad.  Be flexible.  What about supplementing Facebook’s paid impressions with organic ones, using the “social” part in social media and investing time, not money?

Try some other approaches, one at a time, to effectively gauge their results.  Keep what works; put the rest up on the shelf for future reference if circumstances change.  Remember the only thing that matters here: can you buy a $500 sale for $150 and can you do it repeatedly?

Notice that changing the product price, or tweaking production costs were never even mentioned.  These are topics for another article.  The options for success are many.  Stay creative and do not give up.  Just don’t make a mistake that will kill your business.

Review

There have been a lot of mathematical topics discussed.  Here is a parting review:

  • Click Through Rate: number of people who click on your ads or posts
  • Gross Profit per Sale: Item sales price – item cost
  • Daily Income: Annual desired revenue ÷ 365
  • Conversion Ratio: Site visitors ÷ Site buyers (usually expressed as a %)
  • “Times Earnings”: The markup of a product expressed as  “times cost” value

There are many items in the marketing arsenal of every online entrepreneur.  These five formulas are among the most powerful ones for you to use in reviewing your performance, as an online startup, or as an experienced web store owner already selling many products.

These formulas also help you to ensure costs do not get lost in the overall quest for more sales, and keep you focused on the revenue goal.  And isn’t revenue why you are doing this in the first place?  Good luck.  Go get your $1,000,000.

Author

  • 8eeb4f65f2a1b2b993afe8c0d0585123?s=80&d=mm&r=g

    Chris is a busy mom of two, who loves to tinker with computers and read in her free time. Her knowledge of what it takes to start up a business especially businesses that operate on the internet has helped many people from around the world. Chris often shares her experience as an online entrepreneur and business coach, speaking at events all over about how she created multiple successful businesses and profitable websites. She also offers advice on how people can build their own business website or blog for very little money, while still maintaining quality content.

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