Revenue and profit are two important numbers every business owner should know. But there’s another set of numbers beneath the surface that tells you more about where that revenue and profit came from, and where they may be headed. Here are 4 numbers every business owner should know.
You spent $50,000 on advertising, promotions, sales commissions, networking, sponsorships, discounts, and everything else intended to bring people through the door. How many new customers did you actually get compared to the money you spent? That’s your customer acquisition cost.
The number to know
Customer Acquisition Cost = Customer Acquisition Spending ÷ New Customers Acquired
If you spent $50,000 to acquire 500 new customers, each new customer cost you $100. Marketing decisions now become easier to evaluate.
If your average new customer produces $40 of profit but you had to spend $100 to acquire each one, the math doesn’t work…unless that customer keeps buying from you.
After spending all that money acquiring customers last year, how many came back this year? It’s important to understand this number because getting customers is expensive. Keeping them, though, usually isn’t nearly as expensive.
The number to know
Customer Retention Rate = Customers Who Returned ÷ Customers Eligible to Return
Suppose you acquired 500 customers last year and 300 bought from you again. That’s a 60% retention rate. The more interesting question is what would happen to your business if you moved that number from 60% to 70%?
You might discover that improving retention is worth considerably more than finding another advertising channel.
A customer bought from you then disappeared. Did you ever get them back?
Many businesses classify this customer as lost and move on. But your former customers represent an unusual asset: people who already know who you are, already trusted you once, and already decided to give you money.
The number to know
Customer Reactivation Rate = Lapsed Customers Who Return ÷ Lapsed Customers Targeted for Reactivation
Track how many dormant customers eventually make another purchase and, ideally, what caused them to return. Was it an email? A call from a salesperson? A new product? A special offer? Or did they simply wander back on their own?
This distinction matters because it tells you whether you have a repeatable reactivation strategy or you’re just getting lucky. Acquisition tells you whether you can create customers. Retention tells you whether you can keep them. Reactivation tells you whether you can recover them.
Now we need to know what those customers are actually worth.
Imagine two customers. Customer A spends $1,000 on their first purchase. Customer B spends $400. Which one would you rather acquire? You don’t have enough information to answer.
If Customer A never returns, they’re worth $1,000 in revenue. If Customer B comes back twice a year for five years, they’re worth $4,000.
The number to know
Customer Lifetime Value estimates the economic value a customer generates over the course of the relationship.
The numbers on your financial statements tell you the results. The numbers behind them help explain why you got those results. Track them consistently, and you’ll have a much clearer picture of what’s working, what isn’t, and where to focus next.
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