If You Want To Grow Your Business In 2014 And If You Are Trying To Do It On A Budget, You Need To Review This Post And Make Necessary Changes To Position Yourself To Thrive This Year. I Just Hope Your Competition Doesn’t See This Before You Do.

Most small business owners are high on passion but are low on the numbers side of the equation.

Let me explain. Over 80% of small business owners when asked why they started their small business, their answer will be something…I was doing this blah blah…and I know I was good at this one thing and then I found that instead of doing for my SOB boss, I could start my own thing and be my own boss and be better than my boss at it.

So we dug into out savings (may be even took a second mortgage or a line of credit) and took some personal loan from my wife’s parents and we started this small café or restaurant or flower shop, or dog walking business, or personal fitness gym, or this chic boutique shop, or you fill in the blanks.

And to make the matters even more interesting in their naivety, they say that there are XX,XXX number of people in this area and if can get only XX% to come to my store…this time next year, I will be all set, sitting on a pretty neat pile of cash.

How many times have you seen this movie before? I hope you haven’t personally starred in this movie.

There are a lot of good reasons to go and start your own business, but make sure you know that the journey is going to be like.

Two things that every business owner needs to know like the back of their hand is:

1. How much does it cost to get a new customer…and

2. What is the lifetime value customer…I will explain these two in detail here

Now the first one is pretty clear. Once you are done with your friends and family, sooner or later (better sooner than later) you will have to figure out a cost effective way to get a new customer to walk thru your doors and do their first transaction with you.

I cannot even begin to tell you how many small business owners don’t even know that number. For e.g.: Let’s say you put a small ad in a local magazine. It costs you 300 dollars for one time placement and the magazine is going to have a distribution of about 6000 families.

For the sake of simplicity let’s assume that, now out of that 6000 families if you get 10 calls asking for some details and 5 of them come down to your store and 3 of them end up buying a widget that you sell. So in effect you spent 300 dollars to get 3 customers. So in effect your new customer acquisition cost is 100 dollars – using this advertising medium.

Different mediums have different costs and different results. Being a small business owner, you need to have more than one way of getting new customers. Referrals could be one, news paper ads could be another, penny saver could be another, online ads could one and lead generation sites could be another…you get the picture.

Let’s talk about the second metric. Lifetime Value of a Customer.

This number is simply how much this new customer is going to spend with your business over the course of your relationship with him/her.

If you are running a restaurant, you might have this new customer visit your newly opened sub shop for lunch a couple of times a month with an average check of around $12 per visit and let’s say that your average customer stays with you for about 10 months before their job changes or a new shop opens up, or before they commit to losing weight and go the smoothie route or pick any reason.

So based on the numbers above you can say that your average lifetime customer value is 12 X 2 X 10 = $240. So now you know that this new customer is worth about 240 dollars to you. Not all of this profit of course. Let’s say your margins after all the expenses are roughly 30% then you know that your profit potential is $72.

Said another way, if you had to spend ZERO dollars on marketing and advertising to get this customer you would have turned a profit of $72. However since you had to spend $100 on advertising to get this new customer, you are effectively turning a loss in this part of the equation. It’s a slow loss and unless you have your finger on the pulse most people will not realize it and they wonder how they lost their business, in-spite of the fact that they were doing good business.

According to SBA, over 80% of small businesses go under in the first 5 years. These same 80% of businesses would not know their key performance metrics in the first place. Now you know why.

Knowledge is power and knowing the numbers early and accurately gives you the edge and insights that may be otherwise hard to notice.

In this given scenario, there are several things you could do…and they are very simple to do once you know what the numbers are.

They could either opt out of magazine advertising deal and figure out some other profitable medium that would cost let’s say $50 to get a new customer to walk in and then that way they will always have about $22 profit over the lifetime of that new customer.

What if they could use the new hot medium of online and social media marketing to get their word out and drive new clients to their businesses? And the best part is, since it’s too new a medium the costs involved are really low. Imagine if their costs of acquiring new customer drop from $100 to $12, then they will have over $60 in profit per customer. That is over 500% return on investment. So you pay out $12 dollars to make $60 in return.

If that was the equation, then how many $12 dollars would you the capacity to invest now? All of a sudden your marketing budget went from whatever it was to virtually unlimited. And that’s one way you can change the tide and win the game of small business ownership.

Another thing that could be done is have up-sell and cross-sell promotions to increase the average check value from let’s say $12 dollars to $15 dollars over the period of a year. That’s just about 20% increase in the average check. How do you that you ask? Have you gone to McDonalds and once they take your order, they would ask, would you like fries with that, or would you want to make it a meal? That’s upsell. Ok how about you are buying a computer for your business and just when you are checking out at Best Buy they ask you if you would like extended warranty with your purchase. Now to be fair, not everybody buys into the up-sell, but enough people do it to the point where their average check value goes up.

And here is the truth of the matter…most of the time the profit margins on this up-sells are really really juicy. If your margins are 30% overall, the up-sells will generally have margins 2-3 times that. So you see how just adding an u-psell or a cross sell will enhance your profits enormously.

One more thing you can also do is run promotions to bring in the customer one more time a month. So instead of 2 visits a month, run a happy hour, Tacky Tuesday, Wicked Wednesday deal to bring up the average customer visit from 2 to let’s say 2.5 times a month.

So now let’s do the math on the collection side of things. Average check of $15 X 2.5 X 10 = $300. And since your profit margins are higher on the up-sell items let’s say your overall profit margin is 40% now. So now your take home profits are $120 where it used to be negative (loss) of $28. So you in essence you went from losing $28 dollars on every customer to now making a healthy profit of $120.

Now I will be first one to tell you that this one does not happen overnight. Infact for most businesses that is a miracle if they can pull that off, but most of them don’t experience this transformation. However if you are strategic about your business, and are disciplined to learn the numbers and then are able to read the numbers this is a very predictable outcome. So if it took you a full 12 months to transform your strategies to work up your numbers like we did then let’s see what just happened.

BEFORE:

New Customer Acquisition Cost: $100 per customer

Lifetime Value of Customer: -$28 (loss)

Prediction / Outcome: Business is bleeding trying to get new clients

AFTER:

New Customer Acquisition Cost: $12 per customer

Lifetime Value of Customer: $120 (PURE PROFIT – A Cool 1000% ROI)

Prediction / Outcome: Business is profitable and is looking to expand

So just by keeping track of two vital numbers you went from losing your business to getting over 1000% return on investment.

There are 80 plus other ways to tweak these numbers to increase the profitability even more so that it’s long term and is sustainable. Just remember we never did anything with the 5 other callers who had called after seeing our ad. Or how about the 2 more window shoppers who came thru the doors and left without becoming a customer. Do what my friend does. Most business owners try to get a customer to make a sale, instead try to make a sale to earn a customer. There is a right way and a wrong way of going about doing this. More on this particular topic later.

So now here is your action plan:

1. Beginning today, implement a simple system that will enable to you figure out how to calculate your new client acquisition cost.

2. Find out your average transaction cost. Add up all the transactions over a period of time a week or a month and then divide by the number of transactions.

3. Find out the average frequency of your clients visit. If it’s Starbucks, it’s a few times a week but if it’s a dentist’s office then it’s only a couple of times a year. So find out what the number is for your business.

4. Also find out what is the average length of time your client does business with you before they change.

5. Don’t get caught up in all the hoopla, hype to get strangers to notice your business. Make sure the numbers work in your favor. And the only way you will be able to this step is if you have taken care of the first four steps.