When a small business is just starting out, there are only a few costs and metrics to keep track of. Revenue and profits are likely the chief concerns, since most of your expenses were vital for getting your business off the ground. You don’t give them a second thought. And it’s too early to know if you are spending too much time or money on something. But when you are ready to grow, you must examine several new performance-related numbers that can help you determine whether or not your business is indeed capable of taking this leap forward.
After all, preparation is the key to a successful growth initiative. The more attention you pay to costs and metrics as you grow, the easier it is to avoid negative outcomes.
1. Customer Retention Rate
This is number one because the general consensus within the business world is that keeping current customers is more important than gaining new ones. Retention rate refers to the percentage of customers that continue to give you their business throughout a specific time frame compared to the percentage that leave within the same period. Your goal is for your retention rate to be as high as possible. Different industries have their own ways of calculating retention rate but one universal formula begins with subtracting the amount of new customers you gained in a specific time frame from your total customers. Then, divide that number by the amount of customers you had at the start of that period.
Let’s say you started the month with 20 customers. Throughout that month, you gained five customers and lost one, giving you 24 customers.
24 – 5 = 19. 19/20 = .95, or 95%. Most successful businesses can boast a fairly high retention rate, especially service-based and subscription businesses.
2. Customer Acquisition Cost (CAC)
Like retention rate, there are many formulas for calculating your customer acquisition cost, or the cost of acquiring one new customer. For the easiest choice, all you have to know are your marketing and sales costs. Add those numbers and divide the total by the amount of new customers you acquired within a certain time frame. You obviously want your CAC to be as low as possible but you must account for factors like industry, business model, and anything significant that has happened to your business as of late.
Some businesses spend thousands just to gain around twenty new customers. Others, particularly those selling very cheap products, need their CAC to be well under a dollar in order to grow. Ideally, the only time your CAC should increase is after you’ve released a new product or service, or taken some sort of action to raise your profit margins. It’s also difficult to gain a clear picture of your CAC without comparing it to your retention rate as well as this next metric:
3. Customer Lifetime Revenue (CLR)
This is based on the revenue you generate from repeat customers only. So, CLR cannot be calculated without sufficient data but the only data you need is how long you keep your average customer. The amount of revenue you generate in that time frame is usually a reliable estimate of your CLR. This can tell you whether or not your CAC is in good shape because it’s okay to spend more to acquire new customers if the average customer stays with you for a considerably lengthy amount of time. For most businesses, keeping their CLR high comes down to high quality work and incomparable customer service.
Not Just For Your Own Eyes
A big reason small businesses are encouraged to keep track of these metrics is because it dramatically increases of their chances of being approved for funding from investors or business lenders. Businesses that closely monitor performance are likely to be as just attentive when it comes to the costs of advertising, remodeling, or the introduction of new equipment. Paying off a small business loan is much less stressful if you know exactly how much money you need to spend on acquiring and retaining customers to keep your business on the right track.
An applicant for a small business loan, for example, should have goals far beyond revenue and profits. Growth is a gradual process that requires the alignment of many “stars,” like retention rate, CAC, and so on. These metrics revolve around length, as do the terms of a small business loan. Your goals for the small business loan you desire should therefore coincide with the metrics you intend to achieve in the same time frame.
Leading By Example
At United Capital Source, we can attest to the importance of retaining customers. Our success is largely attributed to the effort we put in to forming long-term relationships with clients, many of whom have taken out multiple small business loans with us over the years. The bonus of working with a company that has so much experience with business expansion is that we pass our advice to any client that asks for it. We are well-aware that the purpose of most small business loans is to increase demand, and we will show you exactly what kind of budgets you need to do just that while keeping cash flow stable. UCS might not be the only business lender capable of lightning-fast approvals, but we are certainly among the select few that can help you fill every little piece of the puzzle necessary for accomplishing short and long-term goals.