One equation to rule them all
A simple equation governs the success of any business
LTV – CAC > 0.
Violate this rule and your advisory business dies.
CAC= Cost of Acquiring Clients. It’s less understood than LTV (Lifetime Value of a client) but it governs your fate as an advisor and is responsible for 4/5ths of new advisors washing out of the business.
Yes, over 80% of Financial Advisors don’t make it 5 years in the business. Most of the remaining Financial Advisors earn less than $70K. Given the number of hours advisors work in the early days, that starts to feel like a Barista job at Starbucks. CAC is the thing killing or at least dramatically holding back your financial practice. CAC (in $ and TIME) is holding you back and I already feel you dismissing it.
But I don’t spend money on marketing…
You’re saying, “I don’t spend any money on marketing, so this doesn’t apply to me” or “All my clients are referrals, they don’t cost me a thing.”
If it were true you would have an infinite number of clients. The truth is your time is limited and, since time is what you’re spending, it imposes both an opportunity cost and an upper limit on firm growth.
How do you calculate/measure CAC?
CAC is actually a pretty simple concept that, once you understand, will change the way you look at your business.
If you cannot measure it, you cannot improve it.
– Lord Kelvin
The Formula to measure CAC is:
CAC = Total cost of Sales & Marketing / Number of New clients
Cost of sales and marketing should include ALL marketing expenses, including any time spent (valued at an appropriate hourly rate). Answer these questions:
- Looking at 2012, how many new clients did you bring on?
- How much did you spend in $?
- How much did you spend in time?
Here is a simple example:
Acquired 10 new clients in 2012. Not bad.
Spent $5,000 on 4 events. All ads (Yellowpages, email marketing, etc) totaled $2,500. Logo material $2,100.
Spent avg of 10 hours per month on networking and other marketing. Value at $100/hour, $12,000.
Total Sales and Marketing = $21,600 / 10 new clients, CAC = $2,160
Whoops, you went backwards in 2012
Why? We need to give CAC a little more context. Let’s further say that on average these clients move $200,000 to your practice, you invite them to your client portal, and they move the money on January 1, 2012… Now you see where I’m going.
You just earned a total of $20,000 that you spent $21,600 to get. You lost $1,600 on new client acquisition in 2012.
Oh it’s real
There you go back-pedaling, thinking your time wasn’t a “real” cost so you made money. It’s not the way to run a business, but even if we pretend that’s okay, there is another problem.
You spent your time and money upfront and are getting paid back over time. For you accounting nerds, this is a working capital problem. You need to “finance” that gap one way or another. In the end, CAC really matters whether we’re talking about hard or soft costs.
So what is your CAC (cost of customer acquisition)? How does it compare to your first year revenue?
Let me know in the comments and we’ll see what we can do to help.