Marketing Math: How Much Should You Pay for a Learner?
What can your sales metrics tell you about how you should spend your marketing budget?
As we’ve discussed before, one of the major draws of starting an online course business is your ability to do so with limited funds. Startup costs are low, contributing to a low barrier-to-entry for new businesses. But, many of those businesses that succeed in making a successful launch are hesitant to then begin putting money into any kind of marketing budget. If their current system is working, why pay more than they have to.
The answer, or course, is that a small marketing investment can often yield great returns in new learners. Knowing how much profit you can expect to earn from a learner can help you project future revenues, which is important for making wise business investments. It’s also crucial for understanding how much you should invest in sales and marketing costs to acquire a new learner.
Determining learner value relies on several variables, and these will shift over time as you expand your course and improve your product. It’s not an easy number to discover, but if you want to work out a calculation for yourself, here’s where to start.
1. How much does a learner pay, on average, per transaction?
For this number, we’re looking at the average of all your transactions. Calculating this number is as straightforward as taking your total revenue for a month (or year, or whatever unit of time you like), and dividing it by the total number of transactions. So, if Learner A spends $50 on their first purchase, then Learner B spends $75, and then Learner A comes back again and spends $100, then the average transaction value is $75.
This is a useful baseline to have for your other statistics, but it’s easy to lose important details if you look at just this number. For instance, the fact that Learner A originally made a smaller purchase than Learner B before returning to make a larger purchase is important user behavior. With that in mind, let’s look at the next metric.
2. What is your conversion rate from new learners to regular learners?
Repeat customers have more value to a business than someone who comes once and then never again. It takes a lot of resources to acquire a near learner, and some companies don’t make those resources back in one purchase. These are what’s called a “loss lead,” where a business is willing to take an initial hit on their revenue to gain a customer who is likely to recoup their costs long-term.
Think of it like happy hour at a restaurant: a restaurant may offer a good deal to get customers in the door, expecting them either to stay past happy hour to order more food, or else to come back multiple times after they’ve had a taste of their fare.
However, this strategy only works if a certain percentage of those new leads actually become returning customers. And, of course, the same is true for your course. No matter your marketing strategy, if you can’t convert new learners to recurring customers, you’ll eventually lose by attrition.
3. How frequently does the average learner make a purchase?
One of the reason many programs prefer the subscription model for pricing their courses is that it makes it very easy to calculate the frequency of a purchase. Knowing your users will pay $15/mo. regularly for your course is a lot more stable than hoping they come back to make a $150 purchase once a year.
That said, selling learners on a subscription service is hard work. And even if you don’t follow that payment method, you still need to know how frequently your learners are buying your course. From the previous example, it’s great that Learner A eventually came back to make another purchase, but what if it took over a year for them to do so? And what if they wait another year to make a third purchase?
After all, a learner that makes a $75 purchase every six months is worth more than a learner who makes a $100 purchase once a year. Determining a learner’s purchasing cycle is therefore a critical part of understanding how much revenue you can expect from a learner.
4. What does your learner life cycle look like?
We might like to think that our learners will stay with us forever, but the reality is that most of them will move on sooner or later. They learn what they came for, and now they’re ready to go put it into practice.
If you know how quickly your learners leave, it can help you calculate the total number of purchases they might make before they do. For instance, if your average learner sticks around for four years, then the learner who’s subscribed to a $15/mo. service will bring in a revenue of $720 during that period, while the learner who makes $75 purchases every six months will generate $600, and the learner who only makes a single annual purchase of $100 will make you $400.
5. How many referrals will each learner bring?
Finally, your learners are worth more to you if they do your marketing for you through customer referrals. It might cost you $100 to recruit one new learner, but if that learner recruits a friend while they’re at it, then that $100 you spent recruiting one learner is now $50 each for two learners. That’s great news.
It can be hard to calculate how much your learners are referring you to their networks, and most of your techniques for finding out will have to come second- or third-hand. For instance, you can conduct a survey asking your customers how likely they are to recommend you to others, or you can ask people online how they heard of your business. Either way, learners who refer their friends are a valuable asset, possibly contributing thousands of dollars in revenue of the course of a year.
How do you calculate the total learner value from these numbers?
With all this talk about calculating learner value, some of you might be wondering what that number can tell you about how much to spend on a new learner. The answer, while not easy to come by, is thankfully pretty straightforward.
First, calculate learner value by multiplying the first four costs together, then factoring in the value of learner referrals. So, if an average transaction is $75, your conversion ratio of new learners to recurring customers is .6, your frequency of purchase is 4/yr., average life cycle is 4 years, and the number of referrals you receive per learner is .25, then each learner is worth (75 x .6 x 4 x 4 x 1.25) = $900, or $720 for the learner, plus $180 for the learners they refer to your course.
Of course, you don’t get to pocket all that income. You have operating costs to consider as well as your own salary, and this is where you need to look carefully at your marketing budget.
First, take the revenue your course generates over the course of a year and subtract your operating costs, taxes, and your personal compensation. Let’s say these expenses consume 80% of your revenue for the year. The number you have left is the capital you have to help your business grow.
You will want to set some of that aside for future investments, such as a new website or better camera equipment for shooting videos. But say you take 30% of that income to be your marketing budget. How can you invest that money in such a way that it brings in additional learners and grows your business?
Understanding learner value helps you make better decisions about marketing cost.
If your earlier math is correct, and each learner is worth an average of $900, and 80% of that income needs to be dedicated to business expenditures, and 70% of the remainder toward future growth, then that leaves ($900 x .2 x .3) = $54. Or in other words, you have a max budget of $54 to attract each learner.
Of course, that’s generally a number you want to beat. But knowing it can help you judge the effectiveness of your marketing campaigns. If you spend $100 on a campaign that brings in 10 new learners, then your cost of acquisition per learner was only $10—a fantastic ROI.
As I said before, these numbers change. It’s hard to predict the full lifetime of a learner, so depending on your model it may be more stable to calculate by year. You could find your learners start buying less, or that they recruit fewer of their friends to join than you’d anticipated. You don’t want to count your chickens before they hatch, but if you stay grounded and base your calculations off your actual sales numbers rather than wishful thinking, you will be able to invest your marketing dollars more wisely.