Know Your Numbers
It’s amazing to me that many financial planners know a variety of important numbers. They know the federal interest rate, the current yield on a treasury bond, and even how many points the market has gone up or down. What is even
more
amazing are the two numbers they
don't
know:
1. Customer Acquisition Cost (CAC):
how much money you need to spend to acquire a new client
2. Life Time Value (LTV):
the value of all the amount of money a client spends on your services over time
Knowing and understanding how these two numbers work together is essential to growing a successful business. According to a recent study, a larger percentage of financial planners are acquiring one new customer a month, if any at all. Understanding how these two numbers work together will unlock the potential of marketing efforts and help advisers get a steady stream of new customers to exponentially grow their business.
Customer Acquisition Cost (CAC)
CAC is how much money you need to spend to acquire a new client. How do you find this number? There are a few different strategies, but the most standard strategy is to add the following costs: marketing, sales, and cost of goods or services provided. That number is then divided by the number of customers acquired from those efforts:
CAC = Total Spend / Total Customers Sold
Example:
Attending a Networking Sales Event
Airline Tickets: $1,000
Hotel (3 Nights): $520
Conference Ticket: $500
Total:
$2,025
Customers Found from Conference Attendance: 2
[CAC = Total Spend / Total Customers Sold]
$2,020/2 = $1,010
Customer Acquisition Cost (CAC):
$1,010
Is that a good or bad number? How do you tell?
You can only tell if the CAC is good by simultaneously looking at what the life time value of your customer is.
Life Time Value (LTV)
Lifetime value is the value of all the amount of money a client spends on services over time. For a software company that has an average retention of 12 months for each customer that pays $100/month, the average lifetime value for their customers would be $1,200.
LTV =
total amount of money a customer will spend overtime.
Different industries have different ways of determining the total amount people spend. For a financial planner who builds great relationships with their customers, this number can be very high.
So how do you tell if the CAC is good? Well, the number one rule you should be following is this:
LTV must be
> CAC
If it is the opposite, then you don’t have a business.
Knowing how these two numbers play together is essential. (Example: If you spend $10,000/month on advertising and you received 8 new customers, then your CAC would be $1,250 per customer. If you know and are confident that over the next 5 years those customers will bring in $12,500 each, then you can be sure it was money well-spent.)
The Catch
In many industries, it requires more money upfront to acquire a customer, and real revenue is made on the retention of that customer. Remember our software company example? To get that client to sign up for their service and pay $100/month, it might cost $200 the first month. That means the business is losing $100 on every customer who signs up initially. Understanding the LTV of customers is what grants businesses the luxury of knowing exactly how much they can spend on marketing up-front.
Know Your Numbers
It’s simple! You *need* to know your numbers. The first thing to do is to figure out the CAC and LTV of the business (how much money spent to acquire a customer, and how much each customer is worth). Only then can businesses start having real conversations about marketing efforts.
Most companies should be shooting for their LTV to be 10X their CAC. The truth is with financial planners, that number should be much higher: more like 20X or 30X because of how long customers will actually stay.
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