I created this hub to build on what Ann Sieg says in her e-book, The Renegade Network Marketer. While I generally agree with her line of thinking, I feel that the way she defines these terms is inaccurate. My intention here is to create a more scientific approach to examining these figures, and a simple way to measure them that any solo internet marketer can use to find out whether his/her current marketing strategies are worth continuing or not. This can also be used to compare two potential strategies and see which one is worth investing time or money in. See my other hub about this.

I am going to define efficiency here in a more classical scientific context. Efficiency is simply output divided by input. The output and input both need to be measurable, and they both need to be measured in the same unit. For any sales and marketing strategy, this is about the bottom line. So, we're going to measure all units in dollars and cents. We also need to factor in the monetary value of time, and the time value of money. In other words, your time is worth X dollars per hour, and a dollar today is worth more than a dollar tomorrow. We won't go into detail about the latter here; just keep in mind that a strategy that pays quickly is more efficient than a strategy that takes a long time, if both strategies net you the same amount of income.

Efficiency is net profit divided by investment. 0% efficiency is your break-even point. Negative efficiency represents activities that are costing you money. So, anything with a zero or negative efficiency is ineffective. Anything with a positive efficiency is effective.

To figure out the amount of money that your time is worth, you'll want to look at opportunity cost. In other words, if you have another activity that you could devote your time and energy to, and you know how much money per hour you would net by doing this activity, this is the benchmark you'll want to use. Because, in reality, anything you do is taking your time away from something else and costing you the ability to earn revenue. The amount of money you make from the new chosen activity needs to be at least as much as what you're sacrificing, or else it's just not worth it.

The last point I'm going to make is that as you become more skilled at doing what you do, you're going to find more lucrative activities that reliably produce more income. This will, in effect, raise the hourly rate you'll be using to measure your time. Once this happens, activities that used to be effective may become ineffective.

Let's suppose that you're doing a direct mail campaign. Buying one month's worth of targeted leads from a database will cost you $500, and the materials (paper, envelopes, printer ink, etc.) will cost you another $200. You estimate you'll spend a day putting it together. You know that you could work a day of overtime at the plant, where your payrate is $25 per hour. So, your up-front costs will be $908, including your time. That means that you'll need to net more profit than this in order for your approach to be effective.

You'll be mailing out 1,000 letters to targeted sales leads, and research has shown that people using this approach netted a 1% response rate in the first 90 days, and a response rate of 2% after continuing for nine months. You figure that you can hand-stuff 1000 envelopes in 8 hours, and that you'll spend an hour on the phone with each respondent. You also estimate an average sale of $200 with a 20% close rate. To spare you the math, I've already worked the numbers out, so I'll just tell the story here. During each of the first three months, assuming that these numbers are close to accurate, you'll net $200 in sales. You spent $700 and sacrificed $200 in income to generate these sales. You've ended up at an efficiency of -77.8%.

However, suppose that you persist. During your second three months, things improve. You hone your sales letter and do a better job targeting your leads. Your response rate climbs up to 1%. You learn to boil down your telephone routine to 45 minutes, and you also do a better presentation. Your time spent on the phone decreases and your closing rate goes up to 40%. Your average sale goes up to $225. You become more proficient at stuffing envelopes, so you only have to spend 6 hours doing it. During the second three-month period, you net $900 in sales with the same $700 out-of-pocket cost, and only a $150 opportunity cost. This is still ineffective, but improving at -13.3% efficient. However, when you factor in those first three months, you've got some catching up to do. Over the entire six-month period, you're still at an average of -46.7% efficiency. To date, you're $2,887 poorer than you would be if you'd just put in an extra shift at the factory each month instead.

During the third period of three months, you really start to get in the swing of things. You cut out an entire section of your market that you learn was not helping you at all. As a result, your response rate goes up to 2% and your closing rate jumps to 50%. Your average order is now $250. You now only spend an average of 30 minutes on the phone with each lead. You've gotten a raise to $28/hour at the factory, so you're now sacrificing more income to work your business. You finally make it into the black. You net $1,408 in profits. Over these three months, your efficiency jumps to 128.9%. Very effective. But, taking the entire nine months into account, you're only at 14.1% efficiency. Still effective, but it took you a lot of time and effort to get there. You also had to invest over $6,000 out of pocket.

I honestly have no idea how close these numbers are to reality. I've never done a direct mail campaign. But that's not the point. The point is that overall efficiency increases over time, and almost anything you do will be ineffective at first. Persistence pays.

Your circumstances probably aren't anywhere close to the situation above. You may not have $6,000 to invest, either, and there may be a dozen variables that this story doesn't mention (such as a flaky babysitter who has a 20% chance of failing to show up). There's no point in trying to measure efficiency unless you can do it simply in a practical amount of time, in such a way that gives you the ability to see the reality of your situation and helps you to decide what to do next. So I'll use this module to explain a simple approach you can start using to build efficiency measurement into your daily planning. If you do this rigorously, you'll start to find out things you weren't aware of, and start to see things you can cut out.

This works best with Excel or another spreadsheet program. Here are the steps:

1. Estimate what your time is worth per hour. If you have a job that pays hourly, this makes it easy. At any rate, just pick a number. Don't think too hard about this.
2. Put down a rough estimate of your income goal for the next three months.

3. Now, write down a list of actions you think you'll need to take every day to attain that goal.
4. For each activity you plan to do each day, write it down in a row on the left side of your spreadsheet.

5. Designate each column for one day. Some people use a spreadsheet for each month, and I use a new sheet each week. That's a matter of personal taste.
6. Write down how much time you spent doing each activity.
7. You may want to measure the output of each activity in terms of something other than money. For example, I measure how many articles I wrote and submitted.
8. Create some rows for recording results. Sales, repeat sales, etc.
9. You can put formulas in to calculate the actual efficiency if you want, but you may find that just looking at the numbers above tells you everything you need to know. In any case, the formula is (revenue-cost)/cost * 100.

Most of the work will involve setting up the spreadsheet, and it shouldn't take you more than 15 minutes. Now, as you go through your day, make a habit of writing down what you did and how much time you spent doing it. You don't need to write a log of what you were doing from minute to minute all day long, but just pay attention to the clock while you're working on your business. It's not necessary to have a precise down-to-the-second amount of time that you spent (you don't need a stopwatch), but it's helpful to have a rough estimate of how long something took you. You could just count in 15-minute increments if you want to.

Remember, counting and tracking your activity shouldn't become a time-consuming activity in itself. It also won't work if you don't make a regular habit of it. The key words here are simple and consistent.