The Growth Equation That Every Business Should Know

Growth hacking is becoming a hot topic everywhere, but within the search marketing industry it is growing quite rapidly. Growth hacking is a methodology that involves making incremental changes across a variety of marketing channels with the goal of getting the biggest returns from limited resources. Many startups look to growth hacking to build their user bases since startups typically face heavy limitations on time and financial resources.

A Google Trends report on searches for “growth hacking” from 2013-present.

This increased interest in growth hacking can partially be explained by the fact that many digital marketing businesses which began as siloed service providers (like Adwords management agencies or link building companies) are now having to evolve to fit into a more complex search landscape. As digital channels continue to become more complex and intertwined, digital marketers and online businesses are left to answer: “Where should I be putting my time and money to get the best ROI?”

Finding The Equation

In trying to answer this question, I stumbled upon a fascinating book that explains how different areas of our lives are affected by, or can be manipulated by algorithms. The book, “Algorithms to Live By: The Computer Science of Human Decisions” explains how computer algorithms can be applied to our day-to-day decisions to help us make choices like: how long we should spend on certain tasks, where we should focus our (limited) energy, and when we should throw in the towel on a losing venture. The book is a fascinating read that got me excited about how we, as digital marketers, could apply these formulas to business growth.Then, while attending the Pubcon digital marketing conference in Las Vegas, I came across the simple yet brilliant formula from Theresa Baiocco-Farr that helps distill this question down into one equation. By manipulating one of three variables in this equation, marketers and business owners can methodically and predictably increase their profitability. I want to share this equation with you because it can be applied to any business, regardless of its niche or specialization.

The Growth Equation:

This equation will help business owners and digital marketers better understand where to focus their resources and how to maximize their returns.

The equation is: T x CR x CV = $

T = Traffic

CR = Conversion Rate

CV = Conversion Value

$ = Profit

How To Use The Equation:

The growth equation features 3 variables (T, CR, CV) that can be manipulated to influence the outcome (profit). This formula gives business owners 3 ways to bring in more revenue by increasing traffic to the website (T), by improving the percentage of people that convert once they land on the site (CR), or by changing prices (CV).

Traffic

What it is: Traffic is the number of visitors coming to your website.

How to increase it: SEO, PPC, Social Advertising, Blogging

Conversion Rate

What it is: Conversion rate is the percentage of website visitors that perform a desired action like: filling out a contact form, calling the business, or buying a product. Conversion rate is calculated by: conversions / total traffic x 100.

How to increase it: A/B split testing, UX improvements, Heat Mapping, Qualitative Testing

Conversion Value

What it is: Conversion value is your gross profit when someone completes an action on your website. In most cases, this would be your average sale value or lifetime value (LTV) of a customer.

How to increase it: Raise prices, or increase LTV by improving sales from returning visitors.

Why You Should Pay Attention To This Equation

We see it time and time again -- if a business wants to make more money they go straight to their bottom line and increase their prices. While this may work in some cases, businesses need to be cognizant of the fact that price is just one variable in the big equation of business. Sometimes prices can’t be raised. Sometimes the market or the customer base actually dictate that a business lower their prices. In these cases, this growth equation can be used to improve profitability even in the face of lowered prices.

Let’s look at some examples:

Let’s pretend that a website is selling a socks subscription. Every month the company will ship you a new pair of classy socks so you never need to shop for them again. The company gets approximately 100 visitors to their website each month, and about 5 of those website visitors sign up each month. The company charges $20 per month (recurring billing) and the average customer stays signed up for 2 months, so the average customer value is $40. If we plug these numbers into the equation:

T x CR x CV = $

100 x 5% x $40 = $200 monthly revenue

With this set of variables, the business will make $200 per month from their website if nothing changes. Now let’s pretend that we’ve received feedback from numerous people that the price for socks is too high. If we lower the price to $16 / month, our equation now looks like this:

100 x 5% x $32 = $160 monthly revenue

But, now that we’ve lowered our prices, more people seem to be signing up. By lowering the prices, we have actually increased our conversion rate. Instead of 5% of visitors converting, we now have 10% of visitors converting. More people are responding to the new price point, so the new equation looks like this:

100 x 10% x $32 = $320 monthly revenue

As you can see in this example, by lowering the price, this company actually doubled their monthly revenue because their conversion rate increased. The conversion rate variable is sensitive to major changes to the website and to the business.

Finally, let’s imagine that the company wants to generate even more money each month. This can be achieved simply by increasing the volume of visitors each month (variable T). Theoretically, if we were to set up a PPC campaign through Google Adwords to generate an additional 100 targeted visitors each month, the equation looks like this:

(100 + 100) x 10% x $32 = $640 monthly revenue

So, by doubling the monthly visitors to the website, the monthly revenue also doubles.

Using The Growth Equation in Your Business

This equation can be a powerful tool in helping small businesses shape their digital marketing strategy. It can help facilitate conversations about how various digital strategies can affect the bottom line. I should note that this equation is powerful in practice, but we need to be aware that the data for the variables is rarely constant. Traffic to the website can change seasonally or conversion rates can fluctuate over with no changes to the strategy. This growth equation is not meant to be a hard-line calculator, but it should instead be a jump off point for you to think about the different digital strategies that can be used to improve your business. Try plugging your business's numbers into the equation to see how it works, and let us know the results in the comments below!

Related post: What is PPC?

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