Not all clients are created equally. So how do you know when you should fire a client or hold on to them for dear life? I hate to be the bearer of bad news, but have you looked at your numbers lately?
Your numbers tell you more than if you are failing or succeeding; numbers tell the story of your business. Behind every business decision made should be the numbers telling you why. If you don’t know your cost per acquisition, how do you know the lifetime value of a customer? If you don’t know the lifetime value of a customer, how do you properly make marketing, sales, product development, and customer support decisions? These are the numbers that will dictate your company’s future.
Knowing these two simple numbers will help you make better and smarter decisions about your company. Understanding the value of a customer will help you to know how much you should spend on marketing to acquire a customer; how much you should spend to serve and keep a customer; which customers you should focus on; and how to offer tailored services to your customers.
Cost Per Acquisition (CPA)
Cost per acquisition isn’t the most “friendly” word, but all it is saying is how much you are currently spending on making someone your customer. Your CPA is the most brutally honest metric for return on investment. Clicks and views are great, but ROI is where the money is at. And we all want to be where the money is.
To calculate this you would take the total cost of sales, marketing, salaries, and any other headcount related experiences within a chosen period (for ease, let’s use quarter one) then divide it by how many new customers you received during that same period.
Total cost of sales, marketing, salaries, etc. in Q1/Number of customers that you acquire in Q1
People always ask, “How much should I spend to get a new client?” Well, it depends. What is the average revenue from each client? Or in other words, what is the lifetime value of that client?
Lifetime Value of a Customer (LTV)
Lifetime value of a customer is essentially predicting the future with your client. It is the prediction of total net profit throughout your relationship with the customer. If their net profit is lower than their cost per acquisition, then it is not a client you should work with. If their net profit is more than their cost per acquisition, then they are a client you want to hurry and get signed. To calculate LTV, subtract the amount you spent serving them (include acquisition, installation, and support, etc.) by their total revenue. And if you want to use an even simpler way, use this easy estimate calculator.
Revenue from Customer A – Money Spent on Customer A
Maybe it is a client that just keeps on taking or maybe it is an irreplaceable employee. Either way, if you know your numbers, you will know the right decision to make.