Friday, September 26, 2014

Four Commercial Business Metrics - Key to Growth

Profit in business comes from repeat customers, customers that boast about your project or service and that bring friends with them. W. Edward Deming

Profit and loss statements don't always tell you everything about the health of the business.  Every business focuses on the profits and losses and should.  There are four metrics that can give you an early signal to the trend of the business.

The four metrics are the following:

  • Cost to Acquire Customers (CAC) - also known as customer acquisition cost, this measures the cost of landing a customer.  Calculation would be the cost of marketing and sales including salaries and overhead divided by the number of customers you land during a specific time frame.
  • Lifetime Value of a Customer (LTV) - the more repeat customers you have and the more customers spend enables a higher CAC to be budgeted.  LTV can be difficult at first to calculate as you determine trends.  Once a retention and spend rate is determined the formula gets easier.  Determine what an average customer spends over a specific time period and calculate the return on your original CAC investment.  A rising CAC means you'll need to start cutting costs or raising prices.  A falling LTV indicates you are failing to leverage the most important and least expensive customers you have - your current customers.
  • Churn Rate - Every business gains and loses customers.  Lost customers are like failed investments.  A rising churn rate could be caused by a dissatisfaction with products and services, new competition, or signs of the end of a product life cycle.  Churn rate is a solid indicator of rising CAC and lower LTV.
  • Revenue Percentage - changes in the contribution percentages of revenue can signal problems ahead.  Changes in revenue percentages can often signal not only changes in customer spending habits but also broader trends in your industry and market.
The successful man will profit from his mistakes and try again in a different way.  Dale Carnegie

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