Tuesday, December 5, 2023

I’ve been thinking about measuring our businesses for effective 2024 budgeting.

As we close out 2023 and set our eyes for what will hopefully be a more traditional market sooner rather than later, it might be time to rebalance some expenses. Knowing how to adjust those dials might make a big difference in how your Q1 balance sheet fares.

In order to get the most out of your budgeting process, investing in a few hours of research can yield a huge benefit. While you might be able to quote quite accurate percentages and ratios in “normal” years, outlier years like 2023 might require a refreshed look at the numbers.

Let’s remember some items that are important to know and to recalculate at least annually. You want to work from the most current data set, provided you expect them to remain somewhat constant for at least part of your year ahead.

Customer Acquisition Costs

It’s critical for your business to understand how much it costs to acquire a new customer. Getting noticed and eventually recruiting new customers over to your services can be expensive. But less important than the total dollar expense for customer acquisition costs (which include advertising, special offers, marketing, and discounts), knowing the ratio of how those dollars impact your revenue is critical. The equation for your CAC is straightforward: CAC = cost of sales and marketing divided by the number of new customers acquired – use the same time period for each.

Once you have that value established, you can use it to great effect in decision making. Especially when it is combined with other values.

Cost to Serve

Hidden within your existing customer base are customers whose deals require more expense from you, and those who require less. Despite one-off deals that can spike or dip dramatically one deal to the next, your customers’ track records tend to average out within any single year. By using the formula for calculating CTS, you’ll be able to spot which customers are more profitable for you currently and which are not. The cost to serve represents your cost of doing business to deliver products out the door. It’s everything you do – everything you spend – that falls squarely in the category of production necessities.

If it feels too tedious to calculate a CTS for each individual customer, that’s OK. Just calculate a single across-the-board average, and next we’ll put it to work with another metric.

Customer Lifetime Value

Also known as the Economic Lifetime Value, it represents the estimated amount of revenue a customer will generate for your business over the lifetime of your relationship with them. There are many ways to over complicate this number, and you’re welcome to. But for those who want a quick and thumbnail method, simply calculate the average amount of your revenue the customer has generated in the year, multiply by the number of deals per year they’ve sent over, and then multiply that number by the number of years you typically sustain a customer relationship.

Now, how do we put these all together and make them sing?

Know and teach your staff the real money behind the concept of it costing far less to keep an existing customer happy than to acquire a new one (usually). Empower them to solve customer problems thoroughly and in real time.

Keep close tabs on the health of your customers’ business and their relationship with you. If you spot flagging numbers from a previously reliable customer, you can act quickly to determine if their business is going through something unusual, or if yours is.

By looking at your results, you should quickly spot which are your most profitable customers, and which are your least. First, you might want to engage with your least profitable customers in a different way. Perhaps more interesting, you should start to see a profile emerge of your most profitable customers, and you might decide to market more to prospective customers who fit a similar profile.

Many companies who employ these metrics are quick to spot a trend. Often, 20% of your customers will net out as non-profitable. Another 20% will rank in the highly-profitable cohort. And somewhere around 60% tends to fall in the average profitability group. Knowing some version of that statistic will lead you to more confidently understand where and how to adjust your efforts, in operations, expense management, and marketing investments.

Then just keep it fresh, recalculating not less than once per year – and you just might feel a little bit more control of your business during these confusing times.

For other marketing ideas, see our coverage in The Title Report of ALTA One’s session Customize Your Marketing Strategies.

Until next time,

Mary Schuster
Chief Knowledge Officer
October Research, LLC