In our previous blog, we spoke about – defining the real terms of profitability and growth, devising a sustainable growth plan and using the rule of 45. But, that’s not all.
To strike the right balance between profitability and growth, businesses need to focus on key performance indicators (KPIs) and metrics (such as customer acquisition cost) that align with their long-term goals. Some essential metrics to consider are:
- LTV/CAC: LTV stands for lifetime value of a customer, and CAC stands for customer acquisition cost. This metric helps businesses understand the value they get from acquiring a customer compared to the cost of acquiring that customer. A higher LTV/CAC ratio indicates that the company’s customer base is profitable and provides room for sustainable growth. Ideally, a business should have at least a ratio of 3:1 in terms of LTV/CAC.
Let’s understand the LTV/CAC ratio with an example.
Imagine an Indian SME operating in the e-commerce industry. The company wants to calculate its Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC) to assess the efficiency of its customer acquisition efforts.
Customer Lifetime Value (LTV): The average revenue a customer generates during their entire relationship with the company. Let’s assume the average customer spends Rs. 2,000 per month on the e-commerce platform, and they typically remain a customer for 18 months. The customer lifetime value formula is as below:
LTV = Average Monthly Revenue per Customer * Average Customer Lifespan
LTV = Rs. 2,000 x 18 months
LTV = Rs. 36,000
Customer Acquisition Cost (CAC): The total cost incurred in acquiring a new customer, including marketing expenses, advertising, and promotions. Let’s say the company invested Rs. 30,000 in marketing and promotional campaigns to acquire 50 new customers in a given month.
CAC = Total Acquisition Cost / Number of New Customers
CAC = Rs. 30,000 / 500 customers
CAC = Rs. 6,000
Now, to find the LTV/CAC ratio:
LTV/CAC = Customer Lifetime Value / Customer Acquisition Cost
LTV/CAC = Rs. 36,000 / Rs. 6,000
LTV/CAC = 6:1
Here, the lifetime value of a customer is six times the customer acquisition cost, ensuring substantial long-term revenue for each investment in acquiring customers.
- Customer Retention Rate: Retaining existing customers is crucial for sustainable growth. A high customer retention rate signifies that the business is meeting customer needs and building loyalty, leading to more significant long-term profits.
Formula for CRR = (Customers at the end of the period – New Customers) / Customers at the beginning x 100
In an ideal world, a business have a CRR of 100%, but in reality any number below 15% is not acceptable.
- Churn Rate: Churn rate is the percentage of customers who stop using a company’s product or service during a specific time frame. Keeping the churn rate low is essential for maintaining a stable and profitable customer base. The ideal
Formula for calculating churn rate: (Lost Customers / Total Customers at the Start of Time Period) x 100
- Average Revenue Rate: This metric measures the average income generated from each customer. Businesses should track this metric to ensure that revenue growth is keeping up with the company’s expansion plans.
- Cost of Goods Sold (COGS): Monitoring COGS helps SMEs maintain profitability by controlling the direct costs associated with producing goods or delivering services.
- Net Profit Margin: This metric indicates the percentage of revenue that turns into profit after accounting for all expenses. A healthy net profit margin is essential for reinvesting in the business and fueling growth.
Key note: Set industry-specific benchmarks for metrics based on market competition and your business model to gauge the effectiveness of your strategies.
Now that you’ve mastered the art of balancing profitability and growth, get ready to discover the secrets of building financial autonomy while scaling your business!
In the upcoming blog, we’ll unveil a treasure trove of useful tips and tricks to conquer financial autonomy. These practical and tangible solutions can be easily implemented in your business, empowering you to achieve long-term financial stability and success.
Ready to steer your business towards unprecedented growth and profitability?
We, at Contetra, have helped hundreds of business owners create 10x value of their investment in the business, release blocked cash, prepare their business plans, set budgets, remove bottlenecks, and implement other strategies to take their business to new heights in just 3 months!
So, what are you waiting for? Set up a FREE exclusive business review with us and take your business to new heights by striking profitability and growth simultaneously!
Feel free to book a slot here for a personal one-to-one review – https://calendly.com/reachout-_g/30min?month=2023-06
