Mike Andes walks through the math of customer profitability. If you spend $1,000 to acquire a customer who pays $100 a month, you break even in 10 months. Lose them before that and you lose money. Track your acquisition cost and margin to know when a customer actually turns profitable.
$1,000
$100 per month
10 months
You get a new customer you have to spend some sort of money to acquire that customer. And if it doesn't come in the form of advertising and marketing, it's going to come in the form of admin time or your salesperson to go and get the job. You don't make money from the first dollar you make for with a customer because if it takes $1,000 for me to be able to get to my break even point and I'm making $100 every single month from that customer on a recurring basis, it means that if I turn the customer, if they leave before 10 months, I literally didn't make any money. In fact I lost money on that customer. And so if you're spending money on getting new business and marketing and advertising, you need to know your customer acquisition costs and you need to know your profit margin in order to be able to know how much revenue I need to generate with this customer before I even make a profit.
