Business metrics can unlock great insights into how your business is operating and performing. Traditionally tracking company performance was limited to the measuring of profit, sales, and costs; but now you need leave no stone unturned in your journey to understand your total business operations.
Would you like to understand the value customers bring to your company and the real cost of finding and keeping them? We’re going to explore three customer-focused business metrics that will offer you a new perspective on your business.
Cost to acquire customers (CAC)
Put simply this is the cost of getting new customers to buy your product or service. It will allow you to evaluate the cost of new customer acquisition initiatives and the efficiency of your existing marketing and sales teams. It will also compliment your understanding of the value of existing customers and further highlight the importance of keeping them.
How do you work it out?
It’s calculated by adding up all your marketing and sales costs within a specific time frame (including salaries and the relevant percentage of overheads) and dividing it by the number of new customers that you acquire within that same period of time. This will give you the customer acquisition cost (CAC).
What do you do with it?
If you’ve ever wondered if your marketing is really working or your sales force are pulling their weight – taking a close look at your CAC could be a good place to start. Once calculated you can benchmark yourself against other businesses within or outside your industry to get a feel for how you compare. If you’re going on a customer recruitment drive you can use it as a measure before investing so you can understand the likely cost for each new customer acquired. It can offer the insight you need to be able to question or support future sales and marketing investment.
Lifetime value of a customer (LTV)
There are some businesses whose relationship is built around a single unrepeated service or transaction with their customers – but these are few and far between. For all other businesses there is potential value in understanding the value of repeat business and therefore the total or lifetime value of a customer.
How do you work it out?
LTV is calculated through assumptions, so it’s good to track and test these as you proceed in order to refine your estimates. To calculate LTV you will need to measure/track/estimate your average customer spend over a specific time period, minus the original cost of acquisition.
What do you do with it?
Once you’ve calculated your LTV you can use it broadly to support business decisions. Amongst other benefits your LTV will: allow you to develop a good understanding of the value of specific customers; provide a context to the cost of acquisition; and provide opportunities to evaluate initiatives designed to grow your business and your customer value further.
Churn rate
The churn rate of your business is the number of customers who are leaving your business within a period of time. It’s best evaluated alongside your customer acquisition numbers for the same period.
How do you work it out?
In an ideal world your number of departing customers would be so low you could calculate your churn rate over a long period of time – such as a business quarter, half or a year. But as your business grows and your churn rate potentially increases, you may want to reduce your time period to provide a more succinct calculation of the rate of departure – this is when a daily churn rate calculation may be appropriate. Churn rate is simply the number of customers leaving a business in a period of time.
What do you do with it?
Churn rate should be reviewed in context with your acquisition numbers, acquisition costs (CAC) and lifetime value (LTV) to give you an accurate picture of customers in, customers out, and how much you’re making from them in-between. It’s easy to become statistically focused on how many customers are currently on your books, or how many new customers have been acquired. The greatest insights for driving your business success will come from understanding how many customers are leaving your business too. Once you understand how much it costs to acquire a customer you start to appreciate how important it is to keep them. No market is infinite in size and churn rate can be a valuable measure to use to motivate your team to go further in keeping customers happy.
If you’re interested in using numbers to unlock the secrets of your business, then the sky’s the limit. Some well placed metrics that focus on your customers can provide valuable insight into your current operations and your future potential. Once you start using business metrics that give you insights into your customers, you’ll find it much easier to be customer focused in your day to day business and operations. If you would like to nurture a customer-centric culture, why not consider embedding these metrics into your business plans and company-wide performance measures?
Introducing Fifo Capital
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