Last Updated on July 20, 2020 by John Prendergast
Is this viewpoint nuts?
Some time ago, I wrote about the Silent Advisor Killer – Cost of Acquiring Clients (CAC). In the discussion that followed, there were a number of advisors that disagreed with worrying about the relationship between CAC and the first year margin (FYM) earned from a client. An argument against the importance of the relationship between CAC and FYM went like this:
“I hope my competition views it this way. If it costs me $1.50 or $2.00 to acquire $1.00 in revenue the first year, I’m thrilled to pay that. Because I know that I’m likely to have that client for 10+ years, and I already know the cost to maintain that client is about $0.25 – $0.30 per year for every $1.00 of revenue. So I can outspend my competition for marketing and advertising if they’re short sided in their thinking to build the long term success of my practice.”
To be frank, I read this and thought it was nuts! I figured it meant there was a large group of advisors that needed remedial education on working capital, but then I realized something. The other potential assumption came from a completely different world view. One that was rooted in a very slow growth, where adding 2 or 3 clients is the reference point. In that case, the sentiment isn’t nuts, but it certainly won’t help accelerate growth for your business.
Let’s take a closer look.
Working through the cost of Growth
In this quick screencast, let’s use the tool below to see how your growth rate and CAC ratio impacts the cost of growing your business. (Hint: they don’t behave the same.) You’ll learn that the bigger you want to become and the faster you want to grow, the more critical your CAC ratio is to achieving your business goals.
Downloadable CAC Tool
Here is a very simple tool I built to help illustrate these relationships. Could it be more sophisticated? Yes, but it will help you build the intuition you need to think clearly about the impact of your growth aspirations on your business finances.
The key variables to play with are: Annual Growth (B3) rate & CAC ratio (B9). Play around with these numbers and watch how at even modest growth rates (10-20%) working capital needs are substantial. More interesting is changing CAC ratio.
The base example is from our previous post. While we discussed having a First Year Margin (FYM)/CAC ratio of less than 1, I’ve set it to our goal at Blueleaf of .5. In the comments many readers said, they’d be happy to pay $21,600 for a client with a first year value of $20,000. Set the CAC Ratio to 1.08 and see how the working capital needs change. I hope it’s eye opening.