The 3 numbers you need to know to make most business decisions
“Golf is deceptively simple and endlessly complicated; it satisfies the soul and frustrates the intellect. It is at the same time rewarding and maddening – and it is without a doubt the greatest game mankind has ever invented.” – Arnold Palmer
I’m not sure if Arnold Palmer was talking about Golf or Business?
For many what I’m about to explain below may seem too simple, but I promise you, if you have ever owned a business you will get caught up putting out so many fires that having some quick decision making tools will make life easier, and more profitable.
As a business owner you probably ask yourself, what is my ROI on my marketing? Most small businesses don’t have any systems in place to accurately track the necessary data to perform the advanced analysis to really get that answer. Some may have built an excel spreadsheet to track campaign costs, but when the sales people get too busy and don’t report where the leads came from (i.e. Campaign X) there’s now way to calculate the ROI of the recent Trade Show, or Mail Campaign, etc. What’s even better are the companies who implement a CRM like Salesforce.com with all the advanced data capabilities, but end up using it as a way to manage their sales activity (i.e. Met with Jimmy, have a follow up in 3 weeks to talk about the $35 Trillion Project)…I have to give credit to Salesforce.com – when used correctly it has amazing reporting capabilities that can make a marketers lives much easier, but rarely is that the case in a small to medium sized businesses and almost never in a start up!
If you want a quick way to determine if your business is headed in the right direction, or if your marketing investments are worthwhile, here are 3 metrics you can use right away without spending a week on an excel spreadsheet:
Accounting note – these equations are not based on Generally Accepted Accounting Principals – these serve are a guide to help make quick decisions, more comprehensive tools can be found in the links at the bottom
- Client Acquisition Cost = Total Marketing Costs / Number of New Clients
- Annual Profit per Client = Total Profit / Number of Clients
- Life Time Value of a Client = Avg. Annual Profit * Average Life of Client
Now that you have these answers what do they mean?
Simply put if you want to survive than your “Average Profit per Client” must be greater than your “Client Acquisition Costs.” Remember, this is a simple equation for most businesses and if part of your marketing investment goes towards existing clients it may skew this number a bit, however you are making one of the smartest business decisions a business owner can make.
One of the most expensive things in business is acquiring new clients. If you want to really grow your business, more importantly your profits, than focus on the last metric – Life Time Value of a Client. Find ways to over deliver on your product or service. In an upcoming article we will talk about how important the Top 20% of your revenue is, and why it will help guide what your business does going forward.
If you are looking for more advanced metrics, definitions or the real equations to the above, here are some helpful links:
“For Entrepreneurs” has a really in depth explanation with some downloadable spreadsheets:
Client Acquisition Costs:
Annual Profit per Client:
Lifetime Value of a Client: