Attracting, engaging, and maintaining your customer base requires an investment of your time and resources. To increase your company’s profitability, you need to minimize costs, while maximizing revenue.
So, how do you find a balance between the investment you make in building customer relationships and the amount of revenue each client generates?
There are five essential calculations you should be monitoring and assessing each month to determine and improve your customer relationship ROI.
Monthly Recurring Revenue
Your monthly recurring revenue (MRR) is the amount of revenue your business contractually generates each month from your clients.
From your MRR, you can calculate your Monthly Average Contract Value (MACV).
(Total MRR)/(Number of clients) = Monthly Average Contract Value
These are two of the most important numbers you will monitor. MRR increases your business’ stability and enables you to budget for the future. Monthly Average Contract Value, when considered along with Customer Acquisition Cost, will determine the payback time and the efficiency of your business.
Customer Acquisition Cost
Customer acquisition cost (CAC) is the amount you spend to bring in new customers. During your acquisition process, you make an investment in every customer pursued.
These costs include:
- Sales team salaries
- Marketing efforts
Calculating your CAC is simple.
(All sales and marketing expenses)/(Number of new clients) = CAC
To generate and grow your company’s revenues, costs to acquire customers are a necessary expense. Look for ways to streamline your sales process or shorten the time it takes to close a deal. Assess your CAC regularly to see where you can make improvements.
Months To Recover CAC
This metric is often looked at hand-in-hand with your CAC. How long does it take for your company to recover the CAC invested into attracting a new customer? Look at the gross margin earned from the new MRR that your company is earning from its new client. Ideally, the incremental margin will quickly offset the time and resources invested in closing the deal.
To determine how many months it takes to recover your CAC, use the following calculation.
CAC/(Average gross margin per customer) = Months to recover CAC
If you assess how many months it takes to recover your CAC, and you believe it is taking too long to gain back this cost, review your CAC and look for ways to reduce this metric.
Customer Lifetime Value
What is your customer lifetime value (CLV)? You want your business to turn a profit from each customer as quickly as possible. Once you have gained back your CAC investment, look to your CLV. This is the profit gained over the course of a customer’s relationship with your business.
To accurately calculate your CLV, taking into consideration margins and retention rates, use this equation.
Margin ($) * (Retention Rate (%) ÷ ([1 + Discount Rate (%)] - Retention Rate (%)) = CLV
This metric offers deeper insight into the ROI of your CAC. Your CLV to CAC ratio should be about 3 to 1 (i.e. your profits from the lifetime of each customer engagement will be triple your CAC). To maximize your profitability, try to extend the lifetime of your customer relationships as much as possible.
Maintaining your current customer base is always more profitable than adding new customers when you lose one.
You likely already have some process for monitoring your churn rate, or the number of customers you lose monthly or annually. If your churn rate is increasing each month, you need to determine why your customers are leaving. Does your business typically have short engagements? Are there issues with your customer service approach?
Minimizing your churn rate is one of the keys to increased profitability. Keep your customers happy and build long-term relationships with them to maintain a steady revenue stream.
Invest time each month into assessing these metrics in your business. When you make strategic changes to improve these numbers, you will see an increase in your customer relationship ROI.
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