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Two business critical data mostly unknown

Two business critical data mostly unknown

“The purpose of business is to create and keep a customer.”

― Peter F. Drucker

Therefore, acquiring customers & keeping them are the key functions of the business. What Peter Drucker had said is profound and if we break the sentence into two, we get to know the real areas of focus on:

  • Do something for which we get a customer
  • Do something for which we can keep the acquired customer

To be of value and to remain value for the customers matter. The above realisation makes the following two data very important:

  • Customer Acquisition Cost – CAC
  • Life Time Value of an acquired Customer – LTV

Most entrepreneurs/CXOs do not know two critical business data of CAC & LTV:

(Please ask a few entrepreneurs to validate the statement).

It is not only important for entrepreneurs and CXOs to know both the data, but in order to become more profitable, work on to minimise the former and maximise the latter.

Apple has millions of acquired customers over the years through their superior products. The superiority of their products has helped the company to keep costs of acquiring a new customer quite low and value realisation from retention of customers, quite high.

On the other hand, not so superior product/service companies bear the high cost of customer acquisition and lifetime value of their customers are quite low.

Customer queues in front of Apple stores to buy their products. In times when the world is suffering from overproduction and signs of recession are looming large, this kind of status is rare. This rarity is what makes them unique and aspirational brand.

To know CAC & LTV we also should know about customer retention rate (CRR) and customer churn rate (CCR). In this post, I am not discussing how to calculate the ratio of the LTV / CAC or CRR, CCR etc.

Like any project with quicker payback period offers better ROI, any customer with better LTV/CAC offers better ROI. Isn’t it common sense – a project offers better ROI only if customers serviced with the project offers better ROI?

Therefore, to improve project ROI not only the cost of the project should be competitive, but revenue maximisation should also be achieved and aspired for.

ROI will improve if the CAC is low, but the ROI can also be improved exponentially if LTV is higher. As we all know the bottom line impact of 1% increase in revenue is far better than 1% reduction in cost.

How better customer experience can impact this matrix:

  • Better customer experience = More sales (Everyone likes better experience)
  • Better customer experience = More referral sales (Sharing of better experience, customer becomes brand ambassador)
  • Better customer experience = Quicker sales (Apple customers don’t need more of convincing by salesperson)
  • Better customer experience = Repeat purchase (Everyone likes to have repeat better experience)
  • Better customer experience = Lower churn rate & higher retention rate
  • Better customer experience = Lower marketing cost (Repeat and referral customers, coupled with favourable churn & retention rate)
  • Better customer experience = Lower price elasticity = Better pricing power
  • Better customer experience = Higher LTV (Repeat customer with the referral and up-sale/x sale possibility will enhance life Time value)
  • Better customer experience = Lower CAC
  • Better customer experience = Better EBIDTA, ROI, ROCE

Whether its project payback period or ROI or ROCE it all broadly and ultimately depends on better customer experience. Blue ocean better customer experience creates for the enterprise can act as a solid pull for customers.

Some of the non-financial statement data and ratio every enterprise must focus on and work upon to improve are:

  • NPS – Net Promoter Scorecard
  • CES – Customer Effort Score
  • LTV – Life Time Value of Customer
  • CAC – Customer acquisition Cost
  • CCR – Customer Churn rate
  • CRR – Customer Retention rate

This subject is very important for every business as acquiring a new customer is said to be much more costly than retaining a new one.  It is worth spending some more money on retention than going after acquiring a new one. Better customer retention rate has many happy side effects. This will only happen if they can fulfill their needs with ease and delight.

CFOs should focus more on these data before looking at the financial statement data. These data, though not reflected in the financial statement influence significantly the data stated in the financial statement.

In the book ‘Amaze Every Customer Every Time’, author Shep Hyken writes about ‘Five Dollar Lifeboat’ at Ace Hardware Stores:

… Make it easy for the customer and employee. Is the customer unhappy? Yes. Would making the customer happy cost less than five bucks? Yes. End of the problem.

Employees are empowered to spend up to $ five to make customers happy and no question asked. This has created many happy customer stories and  talk of the town brand.

JD Powers survey and ranked Ace Hardware for eight straight years as “Highest in Customer Satisfaction among Home Improvement Stores.” Their customer satisfaction score, 791 out of 1,000 points, is above retail giants Lowe’s or The Home Depot, respectively 779 and 763.

What is your enterprise’s CAC, LTV or Five boat life boat equivalent?

Learn more about better customer Experience from my new book The Bread is Moving releasing on Amazon on 27th Sep 2015.

 

Sunil Gandhi
Sunil Gandhi

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