Learning to Drive A Marketing Machine Ted Mitchell

Questions on the Basic Concept of Rates, Ratios, Percents, etc. Ted Mitchell

The primary function of a business Is to make a profit! The overall performance of a business is measured by the 1) Amount of profit it makes 2) Amount of Resources it uses to make the profit 3) The efficiency at which it uses those resources to make the profit

A car’s primary function is To allow you to travel distances Overall measures of a car’s performance would include The distance it can travel The amount of gas it uses to make the trip The efficiency at which it uses the gasoline

1) You have a car that gets 25 miles per gallon. Miles per gallon, mpg, is the conversion rate of a machine (car) that converts gallons of gasoline into miles of distance travelled. Can you tell from the mpg how many miles you drove? Yes or No Can you tell from the mpg how many gallons you used? Yes or No

Basic Concept of the Car as a Machine Converts gallons of gas (Input) into a distance driven (Output) Output: Miles driven = conversion rate of the machine (a car) x Input: Gallons of Gas Conversion rate = miles per gallon Conversion rate = (Output: Miles) / Input: Gas You can tell nothing about the overall performance from the conversion rate alone

The efficiency of your car’s performance Your Car Input: Gasoline ???? Conversion rate; Miles per gallon 25mpg Output: Miles driven ????

You can tell nothing about the Overall performance 1) Output Generated: Distance travelled 2) Input Used: Amount of gasoline used From a knowledge of the machine’s efficiency or conversion rate alone However it is an Identity so if you know 2 of the three you can calculate the third

It is an Identity Your Car Input: Gasoline: G If you know 10 gallons is the input Conversion rate; Miles per gallon, mpg 25mpg Output: Miles driven = mpg x G Then you calculate 250 miles driven

2) You have a car that gets 25 miles per gallon. Your friend has a car that gets 20 miles per gallon. Can you tell from the mpg that you drove more miles than your friend? Yes or No Can you tell from the mpg that you used fewer gallons than your friend? Yes or No Can you tell from the mpg that you both drove the same number of miles? Yes or No Can you tell from the mpg that you both used the same number of gallons? Yes or No

It is an Identity Your CarFriend’s carDifference, ∆ Input: Gasoline: G ????? Conversion rate; Miles per gallon, mpg 25mpg20 mpg∆ mpg = -5 mph Output: Miles driven = mpg x G ?????

From two conversion rates Such as miles per gallon 1) You can tell nothing about the comparison of two performances except that a car that gets 25 mpg is more efficient than a car that is getting 20 mpg 2) Never Assume that the two cars being compared drove the same distance or used the same number of gallons of gas

You can NOT compare the overall Performance of Two Machines If you only know the conversion rates of the two performances You need to know the values of the output and the input as well as the conversion rate of the machine

3) After a tune-up your car improved its fuel consumption by 10 miles per gallon from last month to this month. Can you tell from the change in mpg how many miles you drove? Yes or No Can you tell from the change in mpg how many gallons you used? Yes or No Can you tell from the change in mpg that you drove more miles this month than last month? Yes or No Can you tell from the change in mpg that you used fewer gallons this month than last month? Yes or No Can you tell from the change in mpg that you drove the same number of miles this month than last month? Yes or No Can you tell from the change in mpg that you used the same number of gallons this month as last month? Yes or No

Comparing Two Cars Your CarYour improved Car Difference, ∆ Input: Gasoline ??? Conversion rate; Miles per gallon ∆mpg = 10 mpg Output: Miles driven ???

You can NOT compare the Two Performances If you only know the percentage change or difference in the conversion rates of the two performances You need to know the values of the output and the input as well as the conversion rate of the machine

4) You have a truck that got 20 miles per gallon last week. You also own a car that got 50 miles per gallon last week. From the above information is it possible to correctly calculate the average number of miles each vehicle was driven. From the above information is it possible to correctly calculate the average amount of gas the vehicles used. From the above information is it possible to correctly calculate the average miles per gallon of your two vehicles?

What is the average miles per gallon? Your CarYour truckAverage Input: Gasoline Conversion rate; Miles per gallon 50 mpg20 mpg??? Output: Miles driven

What is the average miles per gallon? Your CarYour truckAverage Input: Gasoline Conversion rate; Miles per gallon 50 mpg20 mpgWhy is it NOT (20 +50)/2 = 35 mpg? Output: Miles driven

You Should NOT calculate the average of rates as if they were whole numbers The average rate is NOT the mean of the rates Mean of the two rates, (20 mpg + 50 mpg)/2 ≠ 35 mpg Rates are NOT whole numbers!

Averaging Two Performances Your CarYour truckAverage Input: Gasoline ???? Conversion rate; Miles per gallon 50 mpg20 mpgNOT 70/2 = 35 mpg Output: Miles driven ????

To calculate an average rate You need the 1) total or the average amount of gas used by the two vehicles 2) total or the average amount of distances driven by the two vehicles

Averaging Two Performances Your CarYour truckAverage Input: Gasoline Total gas = 27 gallons Average Amount of gas = 27/2 = 13.5 gallons Conversion rate; Miles per gallon 50 mpg20 mpg Output: Miles driven Total Distance = 900 miles Average distance = 900/2 = 450 miles

Averaging Two Performances Your CarYour truckAverage Input: Gasoline Total gas = 27 gallons Average Amount of gas = 27/2 = 13.5 gallons Conversion rate; Miles per gallon 50 mpg20 mpgAverage mpg = 450/13.5 = mpg Output: Miles driven Total Distance = 900 miles Average distance = 900/2 = 450 miles

Forecasting Your CarYour truckAverage Input: Gasoline Buy 20 gallons Conversion rate; Miles per gallon 50 mpg20 mpgAverage mpg = 450/13.5 = mpg Output: Miles driven Forecasted total distance, 20 g x mpg = miles Not 700 miles

You can NOT correctly calculate The average conversion rate of many performances with out knowing either 1) the total amount of input and the total amount of output used 2) the average amount of input and the average amount of output used

Examples of Driving the Marketing Machine Generating awareness of your product in the minds of potential customers Generating sales revenue from the number of hours you keep the café open

5) This year your product has an awareness level in your potential market of 60% Awareness level is a conversion rate that converts total potential customers into potential customers who are aware of your product. Can you tell from the percent awareness level the actual number of potential customers who are aware of your product? Can you tell from the percent awareness level the total number of potential customers in your market?

Performance of Awareness Building Machine Your Product Input: number of potential customer, N ???? Conversion rate: r Awareness level, r = W/N 60% Output: Number of potential customers aware of your product, W ????

You can NOT measure the overall Performance of the Awareness Building machine If you only know the conversion rate of a performance You need to know the values of the output and the input as well as the conversion rate of the machine However if you know any two of the three values you can calculate the third value

6) Your firm’s ‘customer awareness level’ decreased by 10% last year. Can you tell how many potential customers you had last year? Can you tell how many potential customers were aware of your product last year? Can you tell by how much the potential market increased or decreased from last year? Can you tell if you have more, or less, potential customers who are aware of your product than you had last year?

Performance of Awareness Building Machine Your awareness level Last year Your awareness level this year Difference, ∆ Input: number of potential customers N ???? Conversion rate: r Awareness level, r = W/N Decrease of ∆r = 10% Output: Number of potential customers aware of your product, W ????

You can NOT measure the overall Performance of the Awareness Building machine If you only know the change or difference in the conversion rate, ∆r, of a performance You need to know the values of the change in output and the change in input as well as the change in conversion rate of the machine However if you know any two of the three values you can calculate the third value

Biz-Café is a Marketing machine In which the sales revenue generated per hour is the rate at which the number of operating hours is converted into sales revenue Output: Dollars of Sales revenue, R = (conversion rate, sales per hour) x Input: Hours, H Where the conversion rate, Dollar Sales per Hour = (Sales Revenue, R)/(Hours, H)

7) You own two Biz-Cafes The first café is generating sales of $100 per hour each week. The second café is generating sales of $120 per hour each week. From the above can you calculate which café is making the most revenue? From the above can you calculate which café is staying open for the most hours? From the above can you correctly calculate the average revenue per hour?

What is the Average conversion rate of the Biz-Café Machines? First CafeSecond Cafe Average Input: number of hours, H Conversion rate; Sales per Hour, R/H $100 per hour $120 per hour ????? Output: Sales revenue, R

Average Performance of Biz-Café Machines First CafeSecond Cafe Average Input: number of hours Conversion rate; Sales per Hour $100 per hour $120 per hour Not $220/2 = $110 per hour Output: Sales revenue

Why is the average rate NOT $110 per hour? Your businesses were open a total of 180 hours last week. We are told that your average revenue was $110 per hour so we expect to see your total revenues to be Input: 180 hours x $110 per hour = $19,800 But your total revenues are only $19,600 Why is that?

Average Performance of Biz-Café Machines First CafeSecond Cafe Average Input: number of hours Total hours 180 Conversion rate; Sales per Hour $100 per hour $120 per hour Output: Sales revenue Total Revenue $19,600

Average Performance of Biz-Café Machines First CafeSecond Cafe Average Input: number of hours, H Total hours 180 Conversion rate, r; Sales per Hour, $100 per hour $120 per hour Not $110 per hour Output: Sales revenue, R = r x Input: H Actual Total Revenue is $19,600 It is NOT $19,800

Average Performance of Biz-Café Machines First CafeSecond Cafe Average Input: number of hours Total hours 180 Conversion rate; Sales per Hour $100 per hour $120 per hour 19,600/180 = $ per hour Output: Sales revenue Total revenue$19,60 0

Average Performance of Biz-Café Machines First CafeSecond Cafe Average Input: number of hours100 hours80 hoursTotal 180 average 180/2 = 90 hours Conversion rate, r: Sales per Hour $100 per hour $120 per hour 19,600/180 = $ per hour Output: Sales Revenue, R = conversion rate x Hours $10,000$9,600Total $19,600 average $19,600 /2 = $9,800

It is NEVER safe to assume 1) Anything about a overall machine’s performance being good or bad from the conversion rate alone 2) That two performances are comparable if you only have the two conversion rates or ratios of efficiency 3) That the average conversion rate is equal to the mean of the conversion rates

An Exam Question The efficiency of your servers is measured in sales revenue per server. Your sales revenue per server has dropped by 10% from last week’s performance. It is obvious and safe to assume that your Biz-Café is now generating less revenue this week than last week! True or False? It is definitely false!