Most companies and CEOs can easily tell you about their revenues and bottom-line profits. Some even know what a lead costs or other specific business metrics.
In my experience, though, few know their most crucial number—the cost to acquire a new customer.
I learned about the crucial number from John Paul Mendocha. He's a turnaround expert, and he always focuses on the cost of customer acquisition. Why? Because it's a key leverage point.
Lets use a specialized medical clinic as an example. When asked about their customer acquisition cost, they confidently stated it costs $104 to get a new customer. Average customer revenue was $500, so a new customer was expected to deliver almost $400 in margin (500 - 104).
Unfortunately, a more accurate analysis revealed that the actual cost to get a new customer was $416. The cost to serve that new customer was more than $100, so the company actually lost money every time they got a new customer. Now you see why they needed a turnaround.
Even worse is the situation where customer acquisition cost vary from one customer to the next. There's no way a company can be sustainable if customer acquisition is not predictable. Too many small businesses bump along hoping they'll some how trip over a new customer. The costs are all over the place.
How to Learn Your Crucial Number
So, what is your crucial number?
It's not on any of the reports your CFO or CPA deliver each quarter. That's one reason the crucial number is often unknown.
And, it's not in the marketing reports you may see. I recently saw a presentation where a marketing guy was talking about his 500% "ROI" from Facebook. He was dividing revenue by the cost for a click. That's not ROI. He completely ignored the cost to deliver the product, the costs of managing Facebook, and many other costs.
Your real Crucial Number is the total cost it takes to acquire a new customer. All the marketing costs. All the sales costs. All the advertising costs. Any other costs that go into acquiring a customer. Everything must be considered.
The best way to do the analysis is to map out the entire sales process—all the way from marketing to sales to close. Then, calculate the cost for each step. Not only will you learn your crucial number, but you'll also see which steps are adding the most cost. That's where you get leverage. Improve the expensive steps and you lower your crucial number while improving overall profitability.
Too many companies get this wrong, and I don't want you to be one of those. Calculate your Crucial Number, then schedule a crucial number review to make sure you've nailed it.
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