Two very important skills for entrepreneurs to master are marketing and finances. Understanding the numbers behind marketing requires both, and doing so will give you an even more powerful understanding of exactly what makes your business tick.
Cost Per Client Acquisition
Do you know how much it costs your business to bring in one client? The technical term is “Cost per customer acquisition,” and it’s computed by adding the total marketing and sales costs (excluding retention costs), then dividing that by the total number of clients acquired during a period of time.
Cost per customer acquisition is important to know because you can then compute how long it takes before your business begins to make a profit on any one customer. For example, in software application services with a monthly fee, the break-even for a client can be around ten months.
It’s essential to understand this dynamic for pricing and volume planning purposes. If you price your services or products too low so you can’t recoup acquisition costs in a reasonable period of time, it can play havoc with your cash flow as well as your profits. If you don’t have enough volume to cover overhead and acquisition costs, then your company will be in trouble in the long term.
Customer Lifetime Value
There is a simple formula for calculating customer lifetime value. You can estimate it by multiplying the average sale of a customer by the average number of visits per year by the number of years they remain a customer. That’s the easy version.
The more difficult version of this formula takes into account retention rates and gross profit margins. The formula is: Average customer sales for life multiplied by the gross profit margin divided by the annual churn rate.
Once you know and track these numbers in your business, you’ll be better able to make smart decisions about your marketing investments and your pricing. And if you need help in this area, please contact us at Innovative Financial Services, LLC today.