Over the past couple of months, I've written a decent amount about personal finance. Now, I want to shift my focus toward businesses, both small and large. As a CPA, I’ve had the privilege of working on a range of business accounting and financial challenges. Not sharing some of the insights and lessons I’ve learned along the way just wouldn’t feel right.
So, what is the most important metric a business owner can measure? What is the key metric to look for on a set of financial statements? If you asked these questions to any business advisor, you would likely get more answers than you bargained for. Many might start with "cash is king" or mention "year-over-year (YOY) net profit growth." While these are indeed important, this article will focus on two less-discussed metrics: LTV and CAC.
LTV, or Lifetime Value, measures the total revenue a customer will generate for your business over the duration of their relationship with you. CAC, or Customer Acquisition Cost, measures the amount spent to acquire a customer. Think of CAC as the sum of your marketing and conversion costs. As a business owner, your goal should be to increase LTV while reducing CAC. This combination drives profitability and enhances your business's cash flow. Ideally, you want repeat customers because once they return, the CAC for those customers effectively drops to zero, while their LTV rises. This is also why implementing a strong referral process is essential.
My Two Cents: From a business strategy perspective, you might wonder how to drive LTV up and bring CAC down. The answer lies in creating repeat customers. It may sound obvious, but the foundation of this is a great product. Before delving into the financial intricacies of your business, focus on the back end—address customer feedback, refine your offerings, and ensure your solution is the best it can be. Consider giving away your product and selling the implementation. A vast majority of your brand’s reputation will be shaped by people who do not even buy your product. By focusing on long-term reputation and consistently delivering value, these metrics will improve and grow your business. Remember, the cost of marketing is never in your favor. If your primary focus is improving marketing and conversion rates, you might be in the wrong business.
At J’s Limited, we are committed to making financial education accessible to everyone. If you're seeking practical solutions for your personal or business financial needs, don't hesitate to reach out to me at jslimitedgroup@outlook.com. I'd be happy to chat!
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