Business is numbers. These numbers have to be managed in order for it to grow. Ken gets mechanical and drills down into a couple of critical numbers that every company needs to know and manage. He presents the two values you need to take note: lifetime value of the client and the cost of acquisition. Giving you estimates and calculations, he teaches on figuring out the critical numbers and managing them well.
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We’re going to get mechanical and drill down into a couple of critical numbers that every company needs to know and every company needs to manage, that ‘that is managed will grow’, that, ‘that is not managed will not grow’. Numbers that are managed will grow, numbers that are not managed will not grow. If we’re going to lift the hood of a business, what might be two of the most critical numbers that an outside consultant can come in and monitor, that a company and an executive board could make sure all people in the company understand whether they’re in sales or not?
Number one, what is the lifetime value of a client? That may be the single most important number a company can have. The second number, what is the cost of acquisition to gain the said customer? Number one on the left hand, what’s the lifetime value of a customer? Maybe you’re a dentist and you have clients or patients and maybe you can have a net profit of $85 a visit and maybe in a lifetime, a client visits 30 times. That’s probably high. I’m going to say fifteen. You would take that number if the per visit is $100. The average person in their lifetime visits that particular dentist fifteen times because they may move, they may die, they may hate the dentist. Fifteen visits times $100 per visit. The lifetime value of a client is $1,500.What is managed will grow and what is not won’t. Click To Tweet
If that same dentist then looks at the second most important number, what is the cost of acquisition? That dentist then has to go into their books and into their accounting department and say, “How much did we spend last year on what used to be the yellow pages, which is now different directories online? How much did we spend on the radio? How much did we spend on direct mail? How much did we spend paying someone to blog for us once a week? How much did we spend on any activity that gained us a new client?”
Let’s say they go, “We spent $10,000.” The lifetime value of a customer is $1,500. Here is what we know. If that $10,000 didn’t at least add seven new clients, customers or patients to the dental practice, we know that that marketing cannot be continued. Seven people times $1,500, the lifetime value would be $10,500 and it costs $10,000, so it was a positive $500. If that was the marketing campaign, I would still shut that down because you typically want a nine to fifteen times return on marketing dollars.
You want a nine to fifteen times return from your marketing dollar. If you spent $10,000, you would like to see $90,000 to $150,000 gross revenue, that’s the lifetime value of customer gross revenue. Against all those gross revenues you have all your fixed expenses like employees, the light bill, and plumbers. What are some critical numbers that I believe everybody listening to this podcast needs to break out an Excel Spreadsheet and title columns with? The first column, I want you to title it the lifetime value of a customer. Your homework assignment is to figure that out in the next 90 days. Then your cost of acquisition, that’s another column. You’re going to figure that out in the next 90 days. Then over the next six months, we’re going to talk about other critical numbers that should be monitored, measured and managed. I hope this helps.