As if getting your start-up business up and running isn’t hard enough, business leaders often face an even more difficult struggle in the phase that follows: growth.
Of course, there are many factors that affect the ability to take your company “to the next level.” These reasons can range in everything from product problems, to market condition changes, to resource challenges, and so on. But after decades of personal experience in working with both small and medium-size businesses in financial planning & analysis, I’ve noticed that there’s one single prevailing factor at the core of most growth challenges. And that’s a business model that fails to integrate customer acquisition metrics.
Many businesses are naturally inclined to base their business model on traditional metrics, looking to ROI, cash flow, balance sheet data, profits and losses, and so on to inform their growth targets. But beyond that, you’ll also need to factor into your business model these valuable customer metrics.
So what can business leaders do to ensure they have a business model that supports their desired growth? Where do you even begin? It starts with knowing the right questions to ask. And to answer those questions, look no further than your very own customer data.
Here are three customer acquisition metrics questions every business leader must consider:
1. What is your customer acquisition method – and is it scalable?
How much does it cost to convince a potential customer to buy your product or service? As business leaders know, this cost is called your customer acquisition cost (CAC) – and it’s extremely important to evaluate this metric to project growth.
For instance, let’s say you have a small online company that markets beauty products through social media and email marketing. In this example, you would track and measure your customer acquisition based on the number of customers who click, open and buy. This insight will help you make predictions about how many customers you will acquire in a given period of time, for a given marketing campaign. Determining your CAC, therefore, is essential. However, your analysis should not end there. You also need to ask: is this method scalable? And for that, it’s critical to look at another important factor, leading us to our next point.
2. Is your Customer Lifetime Value (CLV) significantly higher than your cost of acquisition?
On its own, your CAC can only tell you so much about your ability to grow. What matters more is how it relates to your customer lifetime value (CLV).
For example, if your CLV is significantly higher than the cost it takes to acquire that customer, then you are in good shape. As a benchmark, a CLV that is 5-6 times higher than your CAC means your business costs (overhead, inventory, product development, etc.) are covered and you have a sound business model. Conversely, if your CLV is only twice that of the cost if takes to acquire a customer, you may need to optimize your approach to better poise yourself for growth.
3. How quickly can you recover your cost of acquiring customers?
Along with the points above, there is another key question to consider: what is your timeframe for recovering the cost of customer acquisition? Of course, this will vary quite a bit from industry to industry, company to company – but a good benchmark is probably between 6 to 12 months. Anything over one year could potentially be a red flag.
Additional Tips About Customer Acquisition Metrics and Business Models
After you’ve asked these key questions, here are some tips to ensure you are continuously optimizing your business model to stay on track with your growth targets.
- Continuously examine your business model. Your business model should never follow a set-it-and-forget-it approach. Reviewing your data regularly provides valuable insights on how to monetize your customers on an ongoing basis. Again, to do this you need to be sure you’re evaluating both traditional financial metrics in addition to customer acquisition cost, customer lifetime value and capital efficiency.
- Correct “business model failure” and improve business performance. Use your data to identify problems and opportunities. This often requires business leaders to “zoom out” and take a bigger look: how do your metrics stack up against the industry standards? Are you paying attention to trends and fluctuations in the industry? Does your business model fail to reflect current customer trends – and if not, how can you evolve it to better adhere to your customers’ needs?
Again, let’s use our example of a web-based retailer: you have a CLV of $500 per customer, and research tells you that your CLV falls right in line with the industry standard. That overview is a reassuring indication that you have a sustainable model. Conversely, large variances signal a problem that your model may no longer be viable, and the problem must be identified. Did changes to your customer pricing structure, for example, lead to a CLV that is too far below the industry standard?
- Establish processes and procedures that help you monitor and refine. Be sure you implement the processes and procedures that allow the leadership team to constantly monitor and refine your business model. These regular, ongoing analyses are what helps your model evolve and stay viable as time goes on. Remember, even if your business model works today, it won’t stay that way: you need the metrics, process and procedures in place to keep up with changes.
For a small business, this could simply mean designating a resource to financial planning and analysis to provide weekly recurring reports that are updated on a regular basis and broken out in various ways (i.e., by sales channel, by product, by ad campaign, etc.). Those reports speak many truths about your business, meaning executives, line managers and marketing managers should make their ongoing analysis a priority.
Taking your former start-up to the next level is not an easy feat – but when you align your growth targets with your business model, then continuously evaluate and refine that model using the right data, you’ll be better prepared to meet your goals. Keep in mind, for business leaders who lack the time, resources or expertise, you can contact 8020 Consulting at any time for interim support that lays the groundwork for future growth.
About Catherine Cheng
Catherine has 16 years of experience in Finance, Accounting and Operations. Prior to joining 8020 Consulting, she assumed leadership positions as CFO and Director of Finance in companies including Quantum Wellness Botanical Institute, Think-Outside-the-Book Publishing, Thomson Reuters, Encore Software, and Comdata Stored Value Solutions. Catherine’s strengths include strategic planning, budgeting, forecasting, modeling, M&A valuation, due diligence, post-acquisition integrations, GAAP accounting, financial reporting, business intelligence, data mining, ERP system conversion, and process improvement. She is a CPA, and holds both an MBA and a Master of Business Taxation from University of Southern California.
Categorized in: Financial Planning & Analysis