Here’s a marketing secret you may not know: the Cost of Acquisition metric should be at the forefront of any marketing program. It is the primary method of determining the validity of marketing scenarios and, as such, is the most important metric in new business development.
Some examples of inappropriate — albeit quantitative — metrics are listed below:
- In local businesses
- The amount of calls an individual salesperson made
- The amount of phone calls generated off of an advertisement
- The number of walk-ins generated by a promotional scenario
- The number of unique visitors to a site
- The number of attendees at a workshop or dinner meeting
- In a local division of a national business
- The amount of leads regularly received
- The amount of leads coming from a home office
- The amount of calls received caused by an outbound push of product
- The number of unique visitors to a site
- In national businesses
- The number of calls generated to a call center
- The number of attendees at a webinar
- The number of responses to an email blast of opt-in individuals
- The number of unique visitors to a website
There is nothing wrong with any of the above measurements in and of themselves. The problem is that, all too often, they are used to evidence the effectiveness of an advertising campaign, a marketing ploy or the like. The above types of metrics cannot successfully be used to quantify financial success. They can be effective in quantifying brand development, which is highly important to a cash positive business. However, when attempting to generate quarterly free cash flow, a cash flow model needs to be utilized as opposed to a branding model.
Generating free cash flow
The number one financial responsibility of any business is to generate free cash flow. Free cash flow is the funds generated by a business that exceed the cost of operating the business, including its tax liabilities. In most situations, once free cash flow is generated, management is tasked to do one of the following:
- Expand the business
- Reduce debt
- Generate a return to shareholders
In most scenarios where I am called in to help, the client does not have the desired amount of free cash flow. As such, I have spent a good deal of time learning how to work with a limited source of funds to increase cash flow so that management can best move forward with one or more of the goals discussed above.
Over time, I have recognized that the fiscal Bible for business in these scenarios is the study of and adherence to the reduction of the Cost of Acquisition. Below, I offer a very simplistic approach that can be used to analyze a current business model.
For this example, I’ll use a simple situation to which most financial services professionals can relate: attracting a group of individuals to a local retail presentation. We have seen myriad variations on this occurrence, including:
- Bank seminars for local business owners
- Local realtors / mortgage brokers attracting certain groups such as first time homebuyers, investment property buyers, etc.
- Local doctors explaining their expertise in a certain procedure or type of surgery or physical therapy
- Local financial planners and insurance agents offering long-term care dinners, retirement workshops, college planning workshops and the like
Whichever scenario fits for you, simply put it into the formula to begin.
Next: How to calculate costs
Once a scenario is determined, there are two paths to follow. First, we must quantify all hard costs used in developing the marketing of this presentation or advertisement or promotion. Fixed costs include any costs that are directly tied to the promotion in question. Sample costs include:
- All associated payroll costs
- Marketing costs, i.e. mailings, emails, phone calls, direct mail, etc.
- Production costs
- Advertising costs
- Travel and entertainment expenses
The second path is somewhat more difficult to quantify. The second path is that of soft costs. These are costs such as:
- Opportunity costs
- Loss of focus on other opportunities
- The cost of allocation of resources toward the venture
All too often these soft costs get overlooked, especially if the scenario is one that has historically been utilized. In other words, if a bank holds a quarterly luncheon at a local restaurant, some segment of unallocated payroll is used to manage the invitation / RSVPs / menu / details of setup and the like. In any business, these costs are an example of the costs most overlooked.
Add your best soft cost estimate to your already totaled hard cost. By bringing these two sets of costs together, you can now quantify the actual cost of the scenario.
Candidly, most people have not taken into consideration their soft costs and by this point have given up, as it is hard to admit how much time is unallocated in what a manager perceives to be his or her budget for the issue at hand. Additionally, many times we have seen those in internal operations get caught in the quagmire of either not wanting to admit to their department or to other departments how much time and energy goes unallocated to such events.