I work with business numbers every single day and see all kinds. I also see some business owners who have a great grasp on their numbers and others who don’t seem to have any idea at all what they are looking at when it comes to this part of their business.
I get it can be overwhelming, and there are a million different ways to look at this and reports to review and terms to learn, and so on.
So, I thought for today’s newsletter, I’d focus on just two numbers that I think are critical for any business owner to understand and know when it comes to their own business.
The first one is the cost of customer acquisition. What does it cost you to acquire a new customer? This is the sum of the marketing you do to acquire your customers divided by the number of new paying customers you get from that effort. Now, some businesses don’t spend anything and basically get all their customers from word of mouth and referrals from existing customers. In that case, their cost is basically zero.
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Which is fine except when you want to grow, and the referrals you get aren’t cutting it. Now you have to start spending money and trying things to see if you can generate leads for your business, some of which will turn into customers. But how much to spend?
For businesses that do spend on marketing efforts, the next step is to track what that spending is and how much a new customer actually costs.
This can get tricky if you have multiple ads running and different ways a customer can find you. They may see you in several different places before they decide to buy. But if you just sum up all the spending for a certain time period and then divide it by the number of customers you got then (and subtract the ones you know came from referrals or other non-marketing sources) you’ll get a pretty good idea of your cost to acquire a new customer.
Now that you have that number, you can compare it to the value of the customer (another key metric to know) and see if that is working out for you.
Suppose your average customer buys from you four times and spends a total of $1000 with your business. If your profit on the customer is 25% ($250 over the average spend) and you then spend $100 to get that customer, you’re in good shape.
While your profit isn’t as high as if you had gotten them from some no cost source, you are at least still going to make money working with them ($1000 spend generates $250 profit minus $100 in added marketing cost leaves a profit of $150). And you can always try harder to keep them longer, upsell them additional items, and do a great job so they, in turn, give you a referral to another customer that costs you nothing.
Now suppose your new customer only spends $50 with you, and it costs you $30 to get them, and your profit on their $50 purchase is only $10. In this example, each new customer is causing you to lose $20! You’d be better off not doing that marketing at all and not getting those customers!
Yes, twenty of those customers will add $1,000 to your sales for the month, but they will also cost you $400 in losses! If they never buy anything again and don’t refer you at least forty new customers, you’ll be in the hole financially for having gotten them.
Any and all marketing campaigns you do must take into account the cost to acquire a new customer compared with their lifetime profit value and make sure it makes sense to pursue, and you’re getting more value than you are spending.
You may be surprised how many business owners don’t have a good feel for this and so spend money in an effort to grow their businesses, only to wind up worse off and not understanding why, even when sales have gone up.
As you can see, the other key number already mentioned is the second one to know- your profit per customer. A surprising number of business owners aren’t even sure if they are profitable or not, but for the ones who know at least that they still aren’t sure which customers or which services are producing how much profit.
As a result, they may be promoting a low or no profit service over a better one or putting more effort in the wrong direction. Or they may be building the wrong group of customers over the right ones. Or simply digging a bigger hole with their marketing campaigns because they don’t realize the cost of those new customers compared with the profit each one produces.
If you want a long-term successful business, you need to have a firm grasp on what it costs to get a new customer and how much profit that customer is worth to your business. With those two figures in hand, you can confirm they are profitable, and you can get them for a cost that is less than they are going to bring you. And then once you know that the sky is the limit on growing a profitable business!