Most business owners have the best of intentions when starting or building their business. They believe that if they align their passion with their purpose, then the profits will naturally follow; they’re a given.
That’s where they have it wrong. If relying solely on noble objectives, many business owners see, at best, little growth. At worst, their business will fold.
As an entrepreneur, CPA and owner of multiple businesses, I speak from experience and suggest that you view your business and its operations through a completely different lens.
To maintain, grow, and support a strong business, you must start with profit. And to know your profit, you have to understand and analyze the key data that will optimize your business plan.
At the top of this list stands the costs associated with the people who will provide your business with its revenue: your customers.
Unfortunately, nine out of ten business owners have no idea what it costs to acquire, service, maintain and sustain customers.
Here’s a breakdown of what to analyze in each of those four key areas:
1. Business Development: Cost to acquire new clients
When most business owners think about their customer acquisition cost, they naturally gravitate toward business development. This makes sense, given the focus on generating leads and engaging prospects.
However, in this category, you also have to consider and differentiate your cost per lead versus your cost per customer. For instance, if a marketing campaign you spend $10,000 on produces 500 leads, your cost per lead is $20. However, if that same campaign results in only 2 of those leads converting to customers, your customer acquisition cost is $5,000!
To get a true sense of your cost to acquire new clients, you should factor in these expenses:
- Marketing (social media, your website, email campaigns, newsletter, store displays, etc.)
- Virtual vs. in-person meetings
- Market research
- Direct outreach
- Partner programs where you provide referral fees
- Dues for professional organizations and associations
Along with these expenses, don’t forget to analyze your labor costs. Though payroll is typically looked at as overhead, your personnel and their time spent on business development efforts can significantly impact your overall customer acquisition costs. For instance, a business owner may spend a third of her time running her company, a third of her time servicing and interfacing with clients, and a third of her time on business development. Each allotted minute is significant. Analyze your time and how it’s spent to become aware of how your time is helping—or hurting—your profits. And if it’s the latter, you can adjust your schedule to reallocate your time to where it matters most.
2. Operations: Cost to service the customer / Cost to manufacture the products
Once you have a customer, you’ll need to provide services to and/or products for them. In the operations bucket, you’ll analyze the cost to deliver your services or manufacture your products by analyzing the expenses associated with items such as:
- Shipping and handling
Again, you’ll want to examine your labor cost to understand the personnel time associated with it; then, you’ll factor this into your overall figure to determine your operations cost.
3. Quality Control or Client Engagement: Cost to maintain customers / Cost to ensure consistent product quality
As any business owner will tell you, it’s far more cost-effective to retain an existing client than to find a new one. Thus, it makes sense to understand the costs associated with maintaining a client relationship and ensuring consistently good products.
To determine your customer retention and quality control costs, you must review the expenses associated with:
- Communication and feedback mechanisms, including surveys and other ratings and reviews systems
- Client gifts
And like the other areas, payroll cost also factors into your overall costs, illuminating if personnel time is best served here or elsewhere in your business plan.
4. Innovation: Cost to sustain and grow business
The last area of your business to re-examine is one I see many business owners forget about, yet it’s critical for long-term viability: innovation. Understanding the cost to sustain and grow your business means analyzing expenses related to:
- Market research
- Outside consultants and contractors
If you want your business to grow, you need to think through these costs to determine if you can afford to. The reality is that when you acquire new clients, your other costs—to service, maintain, and sustain those customers—will also increase. Remember: you can grow your business only when you have profit.
By understanding and analyzing key data to put profit first while building your business plan, you’ll be able to maintain, grow, and support a strong business; now, and in the years to come.