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The Green Sheet Online Edition

February 22, 2016 • Issue 16:02:02

Street SmartsSM

Know your customer acquisition costs

By Jeffrey I. Shavitz
TrafficJamming LLC

Chet Holmes' 2007 national bestseller, The Ultimate Sales Machine, provided illuminating statistics about business challenges that still resonate among sales professionals today. Some of the key findings were:

  • A corporation fails every three minutes.
  • A directorship changes every 32 seconds.
  • A company changes control every 15 minutes.
  • Ninety-six percent of all companies fail within 10 years.
  • Twenty-six thousand new products and brands are introduced every year.
  • Approximately 25 percent of consumers change brand loyalty in one evening while watching commercials.
  • Seventy-four percent of consumers buy outside their favorite brands.

It is obvious to me that the cost of getting in front of a prospective merchant has increased significantly each year since my introduction to the payments industry many years ago. Advertising rates, marketing fees, travel and entertainment, radio spots, data analytics, personnel, taxes, insurance – everything it takes to find and subsequently land that valuable merchant account – is increasing. And since all these costs are rising, it is becoming more difficult to maintain sufficient profit margins to run your business.

What is the cost of account acquisition?

Given this situation, one of the most important questions to ask and answer for your payment business is, What does it cost you to acquire an account?

It is a simple yet powerful question, and I am amazed at how many business owners, chief financial officers and salespeople I speak with have no idea what the answer to this question is. Do you? Is the cost of acquisition $25, $100, $1,000? Don't guess. If you watch the TV Show Shark Tank, you know that Kevin O'Leary repeatedly asks this question to entrepreneurs who typically give him a blank stare back before eventually replying, "I don't know." Then, without missing a beat, O'Leary will say, "You are dead to me." I am in 100 percent agreement with O'Leary on this. You, as an entrepreneur, must know your numbers to successfully run your company.   This question is critical to determining the financial feasibility of your business, your prospecting plan, your sales and marketing agenda, your ability to hire sub-agents, your compensation program and more. It all lies in quantifying and understanding a question that seems easy enough on its surface, but requires significant effort to answer. Math is all about numbers. You must know your numbers. If you don't, your business will die a slow death.

How much can you afford to spend on customer acquisition? What's your budget? Have you run profit and loss statements on a monthly and yearly basis to understand this vital aspect of your business? If you manage a sales crew, do your salespeople understand these numbers? Do you sit down with your team in a weekly meeting to explain and validate these numbers?

How much can you afford?

Multiple surveys and studies have found that over 50 percent of businesses will go bankrupt in the first years of their existence. Business bankruptcies and closures are commonplace. Your salespeople, whether employees or independent contractors, always want raises and more money – especially those who think that working on full commission means they are causing no real expense to your company, but they are wrong.

The more you pay in compensation, the more your company's available profits are reduced. Without knowing your break-even point, your acquisition cost and other key metrics, it will be impossible for you to make wise decisions about how to compensate your sales force, to name just one crucial aspect of running your business.   I believe many chief executive officers and chief financial officers haven't determined the true cost of customer (or merchant in our sphere) acquisition. If they had, they would realize they are not adding incremental value for their company when it takes a certain number of months to just break-even. I realize that a break-even point of five months, one year, and even longer may be a viable strategy for your business. My point is that you must know what that number is.

LCV and payments

Do you know how much you can afford to spend to acquire a new customer? The answer lies in understanding your lifetime customer value (LCV). Also called customer lifetime value and lifetime value, Wikipedia defines LCV as "the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship. Customer lifetime value is an important concept in that it encourages firms to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important number because it represents an upper limit on spending to acquire new customers."

There are different ways to calculate LCV. My general economics textbook provides the following formula for calculating LCV:

LCV = frequency of purchase x duration of loyalty x gross profit

(Frequency in the payments industry equates to the monthly processing volume of each merchant. Do you go after the mom-and-pop local retailer with volumes less than $10,000 per month, or do you target larger accounts in specific vertical markets that average greater than $50,000 per month?)

Rather than going into further detail on calculating LCV in this article, I'll point you to a useful infographic from the Kissmetrics blog that uses Starbucks as a case study for determining lifetime value: https://blog.kissmetrics.com/how-to-calculate-lifetime-value/.

What are your stats?

In addition to calculating LCV, one simple thing that can help you, your salespeople and management is devising a benchmark system for how many calls will turn into meetings and, subsequently, how many meetings will turn into deals.

We, as for-profit companies, deserve and need to make money to provide our services. Use your time properly and make sure you are being compensated for your efforts. Here's a real-life example of one salesperson's stats for one week:

  • Number of cold calls: 100
  • Number of physical appointments generated: 7
  • Number of Join Me (virtual) presentations: 12
  • Number of closed deals from physical appointments: 1
  • Number of closed deals from virtual presentations: 2

This easy-to-track data will allow you to know your ratios, understand your percentages and thereby help you guide your business to reach the potential you deserve. end of article

Jeffrey I. Shavitz is Chief Executive Officer of TrafficJamming LLC, which is a virtual business group for entrepreneurs and small business owners to help grow a company's sales (traffic = customers in his language). His experience in payments includes co-founding Charge Card Systems Inc., which was sold to Card Connect in 2012; Alternative Merchant Processing, dedicated to high-risk merchant processing; and Charge Card Funding, involved in the cash advance space. Jeff has published four books: Size Doesn't Matter — Why Small Business is Big Business, which became an Amazon No. 1 top release in both the business and entrepreneur categories; Small Business Aha Messages; The Power of Residual Income – You Can Bank on It!, and Networking – Get Connected. He can be contacted at 800-878-4100 or jeff@trafficjamming.com; his websites are www.jeffshavitz.com and www.trafficjamming.com.

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