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Basic Concepts in Market Dynamics

6. The Conversion/Exchange Dynamic

In sections 4 and 5 we covered conversion, the way markets grow, and exchange, one of the three ways markets shrink. The goal of every marketing strategy, therefore is to make certain that your rate of conversion is always greater than your rate of exchange. This way, you will always have a reservoir of future customers and your business will be secure.

The tough part, however, is determining how much greater your conversion rate should be and what specific areas to address to increase conversion. Do you do advertising to build recognition? Open a new location to build access? Or, do you drop your price to increase demand? This is the real test of your marketing and planning skills. This is what will ultimately determine the success or failure of your marketing efforts.

The first step is to determine the optimum conversion/exchange ratio (C/E) to meet the primary marketing objective of having a solid foundation for your business. While the actual number will vary from business to business, the formula or rule of thumb is quite easy to apply.

Most marketers can simply take their quotes to closings ratio and double it. In other words, if you close one out of every three leads or prospects, then a C/E ratio of 6:1 will ensure a steady flow of new business from your market.

In the above example, this means that, regardless of whether you use advertising, promotion, publicity, telemarketing or network marketing, as your primary conversion tactic, you will only be secure if, for every sale, you are able to draw six more people in as future prospects. If your quotes to closings is 1 in 10 your C/E ratio should be 20:1, and so on.

Why do we double it? This is done to offset the increased competition with occurs as a result of your exchange shrinking the market. Additionally it compensates to a degree for both market decay and market recession.

While there are more precise and complicated ways of determining C/E ratios, in my experience, businesses who base their marketing investment and budget on this simple formula are not only more successful, but more responsive since they calculate it using their own sales figures and they are able to plan growth in advance. They don't need some outside expert to tell them how much to spend.

Where to invest for maximum impact is a different story. In the next four chapters we will cover the three types of conversion tactics: Promotional tactics, to build recognition: Distribution tactics to build access: And Supply tactics, to build demand.

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