Are business decisions particularly hard to make for you?
Are you afraid that those decisions can have a significant impact on your business and you fear you will make the wrong choice?
Whether the choice is about hiring a particular individual or adding or removing a feature from their product, making business decisions can be a challenging and often daunting task for business owners and managers.
Fortunately, there is a way to simplify the decision-making process by using a set of financial metrics that serve as a compass to guide businesses towards success.
In fact, there are just four key financial metrics that every business should focus on.
By focusing on these metrics, businesses can make better decisions that will drive growth and profitability.
Let’s dive into these metrics and learn how to use them to drive success.
The four business metrics
The success of any business is heavily reliant on its ability to manage costs and generate revenue and all the processes this requires can be summed in four fundamental metrics that are:
- Acquisition cost.
- Fulfillment cost.
- Operational cost.
- Revenue.
Acquisition cost
Is the amount of money a business must invest in order to acquire customers.
This is not just the money spent for advertising or marketing campaigns, but literally every cost that goes into reaching an audience and turning prospects into paying clients.
With this definition, the acquisition cost includes both marketing and sales activities and all the activities that support the acquisition of clients.
Fulfillment cost
This includes the cost of delivering products or services, as well as customer service and support.
While some may consider labor as part of operational costs, it is more appropriate to include it in fulfillment costs, as labor is directly tied to delivering the promises made to customers.
This distinction is important because it can help businesses reduce fulfillment costs, which in turn can lead to increased profitability.
Operational cost
Is the cost of running the business, which includes expenses such as accounting, software, and hardware.
Revenue
Is the income generated by the business, which must be sufficient to cover all costs, including profit and taxes.
Let’s dive deeper in these metrics
By breaking down the business into the four components above, business owners and managers can gain a better understanding of the key financial metrics that drive their success.
From these four metrics, we usually infer at least two other critical pieces of information that businesses should use: customer lifetime value (CLTV) and customer acquisition cost (CAC).
CLTV is calculated by dividing the total revenue generated by the number of customers, while CAC is the total acquisition cost divided by the number of customers.
But these two metrics are not enough to run a business profitably and it’s important to delve deeper and look at the other two components of cost:
- customer fulfillment cost (CFC)
- customer operational cost (COC).
These metrics can help businesses determine how much it costs to fulfill promises made to customers and run the business.
Every decision made in business must either decrease CAC, CFC, COC, or increase CLTV.
Before making any significant changes, it’s important to determine which of these four metrics will be affected by the decision.
If a decision does not meet these criteria, it’s likely the wrong decision.
Different examples of the weight of these metrics
Business decisions can be challenging, therefore, it’s essential to understand how these metrics work together in various industries.
Let’s consider digital products as an example. In this industry, companies selling online courses have low fulfillment costs since the platform handles most of the work, resulting in minimal operational expenses.
Therefore, the primary cost is acquiring customers, resulting in a high customer lifetime value.
However, e-commerce is a different story. In this industry, fulfillment costs are high since products have to be shipped and handled, resulting in a higher cost of customer fulfillment.
The cost of acquisition is lower than digital products since potential customers visit the e-commerce platform with the intent to purchase. Operational expenses are low, and customer lifetime value tends to be high for e-commerce businesses.
In the realm of popular businesses, software as a service (SaaS) has gained significant traction. However, this model is associated with high customer acquisition and fulfillment costs.
By optimizing the product offering, SaaS companies can manipulate the fulfillment costs, which is crucial given that it can make or break the bottom line.
Finally, consulting incurs high fulfillment costs, which largely stem from the labor-intensive nature of the service.
Consequently, switching to a different offering, such as selling online courses, could be a strategy to reduce the fulfillment costs.
How to calculate the weight of these metrics on your business
In analyzing business metrics, it is crucial to assign weights to each component of the equation to properly evaluate the overall performance.
Customer lifetime value (CLTV) is always the most significant factor, as it must cover all the other metrics. On the other hand, operational costs have the smallest weight.
To provide different weights for the metrics, the Fibonacci sequence can be used. Assigning the value of 1, 2, 3, and 5 to, respectively, COC, CFC, CAC, and CLTV, can ensure a fair distribution of weights.
While the weight distribution can vary depending on the type of business, the mentioned weights are generally reasonable.
The weight of business services and activities
Assigning these weights can aid in assessing the importance of the main 12 services or activities that can help businesses grow.
It is important to note that the weights assigned to each metric may vary depending on the type of business or industry.
However, with this method businesses can make informed decisions about which activities to pursue to achieve their desired outcomes.
In analyzing the impact of different business activities, it is important to consider the main metrics that are affected.
For instance, let’s consider branding. Branding primarily impacts customer acquisition cost by building trust and making it easier to acquire customers, so we can give it a weight of three points.
Positioning, on the other hand, can help to decrease customer acquisition cost, change the fulfillment cost by switching to a different offer, and increase customer lifetime value by determining what products or services to sell.
Therefore, it receives a weight of six, with three points taken from customer acquisition cost, two points from customer fulfillment cost, and one point from customer lifetime value.
Activities like SEO, social media, and lead generation mainly impact customer acquisition cost, so they weigh three points, while email automation can help to decrease both customer acquisition cost and fulfillment cost and increase customer lifetime value. As a result, it receives a weight of five.
Conversion content is a vital sales enablement tool that we provide as one of our core services. Through this, we conduct interviews with salespeople and create videos and blog posts that they can use to communicate with customers in an automated and effective manner.
This not only establishes a relationship with the customer before the salesperson even speaks with them, but it also helps to reduce the customer acquisition cost, decrease the customer fulfillment cost, and even increase the customer lifetime value, as seen in the case of automation.
As a result, we rate conversion content as a six on our impact scale.
Additionally, our conversion rate optimization (CRO) and research services also receive a six rating because they are highly effective in reducing the customer acquisition cost, identifying areas where we can adjust our offerings to reduce fulfillment costs, and potentially creating new products to enhance the customer lifetime value.
In analyzing the different factors that can affect a company’s success, one key element that stands out is offer design.
According to our assessment, offer design ranks an impressive eight, or even nine, out of ten in terms of its impact on business outcomes.
Why is this?
Because offer design can significantly alter the cost of fulfillment and customer lifetime value. By modifying the offer, a company can make substantial changes to these critical metrics.
Another significant factor in business success is sales, which we rate a five out of ten. Sales can significantly lower customer acquisition costs, particularly when salespeople are used to close deals.
Moreover, sales can also contribute to higher customer lifetime values when additional services are sold to customers during the sales process.
Processes and SOPs (Standard Operating Procedures), on the other hand, have a lower impact on business outcomes, scoring only a three out of ten.
While they can improve quality, they don’t significantly impact cost reduction.
Finally, product development ranks a six out of ten, as investing in this area can help lower customer acquisition costs and increase customer lifetime value.
Overall, understanding the relative importance of these various factors can help businesses prioritize their efforts and allocate resources accordingly, leading to greater success in the long run.
How to implement the most impactful services and activities
As we just saw, not all activities are created equal. Some activities may be easier to implement but may not have a significant impact on the business.
These include activities such as branding, SEO, social media, and standard operating procedures. While they may be important, they do not necessarily lead to significant growth.
On the other hand, hard activities that require a change in product, offer, and business infrastructure have a higher potential to drive growth.
These activities require a more significant investment of resources and may involve taking risks. However, the potential payoff can be significant, leading to higher revenue streams and greater profitability.
At Leads and Conversion, we specialize in dealing with these challenging activities for our customers.
Our focus is on helping businesses identify the activities that will drive growth and then take the necessary steps to implement them effectively.
By focusing on these critical activities, businesses can potentially bring their operations to a different position.
Do you think our services could be usefull for your business?
Get in touch at leadsandconversion.com/start and book a free call.
