Defeating The Silent Advisor Killer

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Is this viewpoint nuts?money burning

Recently 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:

Bryan’s comment:

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 figure it means there is a large group of advisors that need a remedial education on working capital. But then I realized something. The other potential assumption came from a completely different view of the world. A view rooted in 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 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? Sure. 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 the 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 a 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.

Have fun.

Also published on Medium.

John Prendergast is the co-founder and CEO of Blueleaf. He serves on the board of WiredTiger, a developer cloud optimized databases. He is also the founder and organizer of the Lean Startup Circle Boston. In addition to his decade and a half as an entrepreneur, John spent nearly a decade as an investment banker and financial advisor.
  • Jason Wenk April 2, 2013, 7:05 pm

    Good stuff John! I guess I only need $375 of working capital 😉 High margin marketing and a high growth rate seems to be the ticket.

    • John Prendergast April 2, 2013, 7:10 pm

      Ok, I knew you were good but that’s a business model I’ve got to see. Remember you’ve got to include all the costs of your people as well as variable marketing spend like media. In your case it would include the marketing related tech spend. If that’s all in there, you may have found a perpetual motion machine!

  • William Callahan April 22, 2013, 5:45 pm

    Great post, John.

    May I also ask what software you used to produce that video? It’s simple, but it looked great.

    • John Prendergast April 22, 2013, 6:29 pm

      Thanks. We used Camtasia on a Mac for screen capture. We use Wistia for the video hosting which is a huge part of the quality of the video

  • bobrichards July 10, 2013, 10:10 pm

    I am a retired advisor and my return on marketing dollars was always so high (and is the same for all advisors who market correctly) that the issue is moot. I did seminars. Investment for a seminar $5,000. First year revenues from new clients from that seminar $25,000+. I sold the same stuff as everyone else. Most types of direct-response marketing have first year returns of 300%+ so anyone needing to calculate profitability is either wasting money on branding or conducting DR marketing incorrectly.
    Bob Richards, Editor
    Wealthy Producer