The 97 › Strategy 40 › Week 11
The point
Two questions. What does it cost you, all in, to acquire one new client? And what is one client worth to you, all in, over the entire life of the relationship?
Every decision you will make about growth is a comparison between those two figures. Whether an advertisement is working. Whether a salesperson is worth the salary. Whether a channel is viable. What you can afford to pay a partner. Whether a discount is an investment or a wound. Without them, every one of those is made on instinct and defended afterwards with a story.
Now the observation that matters. The business that knows both numbers can outbid every competitor who does not — legitimately, permanently, and without any cleverness at all. If a client is worth four thousand over four years, you can afford eight hundred to acquire one and be delighted. Your competitor, looking at a first transaction of three hundred and trying to keep acquisition under a hundred, cannot follow you anywhere. He will conclude the channel does not work, because for him it does not.
You are not smarter than he is. You know what a client is worth and he is guessing.
And not all buyers are worth the same, which is the second half of it — the average conceals the fact that some of them are worth many multiples of the rest.
The mistake almost everyone makes
Counting the advertising and forgetting the salaries. Most owners' acquisition cost is between two and four times what they assume, because the sales payroll never makes it into the arithmetic.
The test: Did the figure include everything you spent to win business — payroll, events, tools, travel, agency — or only the media?
| Who | What happened |
|---|---|
| Not all buyers are worth the same | Jay's own point. The average hides that a fifth of your clients may be worth several times the rest, and they are not the ones you would guess. |
| Referral value | If one client in five sends another, each client is worth an extra fifth of a client. Leave it out and your figure is far too low. |
| The outbidding advantage | Knowing lifetime value lets you pay more per acquisition than a competitor can survive, in the same channel, at the same time. |
| A subscription business | Churn rate is lifetime value. Two points of monthly churn is the difference between a viable channel and an unviable one. |
| A professional practice | Discovered its most profitable clients were its smallest, because they took no partner time. |
| A retailer | Found acquisition cost was triple the assumption once store payroll was allocated properly. |
| Allowable acquisition cost | The number that tells you what you may spend. Almost nobody can state it, and everybody has an opinion about their advertising. |
| An agency | Worked out that a client was worth eleven times the first project, and stopped negotiating on the first project. |
This week
Take last year. Add everything you spent to win new business — advertising, sales salaries and commissions, events, agency, tools, travel. Divide by the number of new clients you actually gained.
Then: what does an average client spend in a year, how many years do they stay, and what do they refer? Multiply, and add the referral value.
Hold the two numbers next to each other. That comparison is the most clarifying thing you will do this quarter.