Two very important skills for entrepreneurs to master are marketing and finances. Combine them by understanding the numbers behind marketing, and you have an even more powerful understanding of your business.
Key Numbers – Cost Per Client Acquisition
Do you know how much it costs your business to bring in one client? The technical term for this is “Cost per customer acquisition”. This is computed by adding the total marketing and sales costs excluding retention costs and dividing them by the total number of clients acquired during a period of time.
Cost per customer acquisition is important to know because then you can compute how long it takes before your business begins to make a profit on any one customer. In software application services with a monthly fee, the breakeven for a client can be around ten months.
It’s essential to understand this dynamic for pricing and volume planning purposes. Services or products that are priced too low so that your acquisition costs are not recouped in a reasonable time, 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 and an academic formula for customer lifetime value. Customer lifetime value is the average sale per customer times the average 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. Average customer sales for life time formula: gross profit margin divided by annual churn rate.
Once you know and track these numbers, you’ll be better able to make smart decisions about marketing investments and pricing. And if we can help you, please reach out as always.