Acquire Cheaper and Better Customers (Financial Priority Formula Part 3)
Sep 23, 2024Today, we delve deeper into Part 3 of the Financial Priority Formula series, focusing on acquiring cheaper and better customers, and wrapping up the series with two final, game-changing metrics.
As entrepreneurs, one of our primary goals is to ensure our businesses operate like well-oiled machines. Shannon breaks this down into seven crucial elements, starting with gross margin, operating profit, and cash flow. These foundational metrics ensure your business is a secure "machine" for handling money. Today, we spotlight elements four and five: Client Lifetime Value (LTV) and Client Acquisition Cost (CAC), followed by two unexpected metrics that tie everything together.
LTV measures the total revenue you can reasonably expect from a single customer account throughout their relationship with your business. It helps you understand how much revenue each client brings in and informs your customer acquisition strategy. For example, if you earn $2,000 in revenue per client per month and it costs $1,000 to serve them, you have a 50% gross margin. If a client stays with you for two years, the LTV is $24,000 ($1,000 gross margin per month multiplied by 24 months). Knowing your LTV allows you to make informed decisions about how much you're willing to invest in acquiring new customers.
CAC is the total cost of acquiring a new client, including marketing expenses, salaries for the sales team, software costs, and any other expenditures used to gain new customers. Shannon likens CAC to fishing: spending 6 hours fishing but catching two fish in the last 10 minutes technically took you 3 hours per fish, considering the entire effort. This means CAC involves all the money spent on acquisition activities, not just successful ad campaigns or networking events. For example, if you spend $50,000 over a year on marketing and acquire 10 clients, your CAC is $5,000 per client. Both LTV and CAC should be considered over the same time frame to calculate an effective acquisition strategy by dividing LTV by CAC. Ideally, this ratio should be above eight or ten, signaling an efficient acquisition process.
Once you've streamlined your gross margin, operating profits, and mastered LTV and CAC, two more metrics should come into focus: time and taxes. Time management is crucial for entrepreneurs. Shannon notes that once you have a profitable and effective acquisition strategy, it's essential to audit where your time and energy are going. Are you focusing on high-value tasks or getting bogged down with minutiae? Efficient time management involves delegating tasks that can be handled by others, freeing up your time to focus on growth and strategy. Hiring the right team members plays a pivotal role here, enabling you to step away from daily operations and dedicate your time to more critical areas of the business.
Contrary to popular belief, Shannon argues that taxes should be the last concern once you have mastered other elements. Too often, entrepreneurs fixate on tax minimization without first ensuring the profitability and cash flow of their business. "Taxes are like the itch on the surface of your skin, but there are underlying issues that need attention," Shannon explains. Once you have a machine that works and generates significant profits, your tax concerns become secondary. A well-managed, profitable business should have the cash flow to comfortably handle tax obligations.
This comprehensive breakdown of the Financial Priority Formula offers a roadmap for creating a financially healthy and thriving business. By understanding and optimizing gross margins, operating profits, and cash flow, then mastering LTV and CAC, and finally focusing on time and tax efficiency, entrepreneurs can build a robust and sustainable business model. If you find yourself needing help with any of these steps, Shannon offers personalized power sessions. Reach out to her via Instagram @shannonkweinstein or through the Keep What You Earn website.
We hope these insights transform your business strategies, making your financial journey as fulfilling and productive as possible! Stay tuned for more episodes and practical advice from "Keep What You Earn."
What you'll hear in this episode:
06:02 Consider all acquisition costs for better insight.
07:59 Evaluate LTV to CAC ratio for business success.
11:09 Focus on core profitability before stressing about taxes.
15:10 Connect on Instagram, website for business help.
If you like this episode, check out:
Lowering Your Price to Sell More?
Product or Experience - What is More Important?
How to Prepare to Sell Your Business
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
