When looking at the health of your business, there are a few key metrics that are probably very important for your business to know. The first one that might come to mind is profit and loss, viewed over time. While this is an important mainstay of any business analysis, it does not always provide good insight into the long term health of a business.
Here are some more that you should probably look at or have an accountant calculate for you.
Cost of Customer Acquisition
This is also referred to as CAC or Customer Acquisition Cost. The CAC is the metric of how much it costs to bring in a new customer through the door. This includes all the costs of sales and marketing, and all the staff and overhead costs associated with acquiring a customer.
To work this out, you simply need to add up all the time costs and other costs associated with your sales and marketing efforts over a period of time. Then you need to see how many customers were acquired during that period of time. By performing a division operation we can get a dollar value, which is what our Cost of Customer Acquisition is.
The churn rate of your business is the turnover of customers. It can also be used to describe employee turnover, but in this case we are talking about customers. Churn reflects an ongoing cost to your business in replacing the customers that leave, when you multiply churn by the CAC previously discussed.
High churn rates could reflect a problem in the service your business is offering, but could also be a symptom of the product or service you are delivering. For example, a marriage celebrant should (hopefully) only have their services required once by each customer. It is better to look at changes in churn rate if possible, or find a way to compare it to other businesses that have a similar model to yours. This will help to identify problems with service delivery and customer satisfaction.
Lifetime Customer Value
This is how much the average customer is worth to your business in total over a lifetime. For a new business, this can require a certain amount of guesswork, but it is good to have an idea of where this number will be. If you have a high customer lifetime value, you can afford to spend more on the cost of customer acquisition.
Lifetime customer value can be increased by marketing strategies such as upsell, and other strategies that leverage existing customers. The post purchase satisfaction stage of marketing is especially important here. This keeps your customers coming back.
This look at business metrics is brought to you by McKinley Plowman, a Perth based accounting group who are always happy to talk to you about your business.