2 SIMPLE YET ALMOST NEVER USED FORMULAS THAT PROVIDE CRITICAL INSIGHT TO YOUR REVENUE

Customer Profile Matters

The profile of a company’s customers, including how they buy, how long they stay, how much it costs to win them, and the margin they leave behind, tells the real story of risk and sustainability.

Digging into your customer profile is an excellent exercise.

Revenue without context is just a headline.

Businesses can’t scale with a high-risk customer demographic, and Buyers don’t pay for sales today; they pay for the likelihood of sales tomorrow.

The stronger and more predictable the customer profile, the more value in your business.

Formula 1: Customer Attrition & Acquisition Cost (CAC)

This is an essential metric to get right, and many businesses overlook these fundamentals without realising it.

Here is a simple formula that can be applied to any business:

New Annual Customer Revenue – Revenue from Customers who have left = X

Then:

X – Marketing/Advertising Expenditure = Y

If the Y number is low or in the red = problem

TIP: Genuine customer acquisition costs may not appear in marketing journal entries.  Allocate other expenditure associated with customer acquisition costs. This is commonly an allocation for Salesforce and product/service samples that are provided to win the client.

Formula 2: Margins by Customer

Not all revenue is created equal.

Some customers deliver healthy, repeatable margins, while others drain resources with low profitability or high service demands.

Segmenting revenue and margin by customer type helps highlight where true value lies and where hidden risks erode performance.

It’s disproportionately easy to develop a net margin by customer financial model, compared to the value and insight it can provide you.

This is a case of knowledge is power.

Develop a “fully loaded” Gross Profit – essentially the Net Profit margin for each of the Customers. Be sure not to just allocate by %, this exercise needs to be done for each client based on their unique servicing costs. Expenses to allocate to the unique servicing costs are anything unique to that client (don't include fixed costs such as rent). This could be costs like labour, logistics, software, hardware, training, discounting, repairs and maintenance.

This looks like:

Customer Revenue – (Gross Profit - Customer Unique Servicing Costs) = X

Then:

Compare X for each customer to determine their underlying value to the business each month or quarter.

Over the course of one year, is X increasing or decreasing?

Decreasing = problem.

TIP: If your business has hundreds of customers, take sample sizes. For example, the top 5, middle 5 and bottom 5

Summary

Developing meaningful financial modelling for any business is simple and provides critical insight to support strategic decisions that ultimately drive profit, sustainability and growth. acquisition would look like. Happy buying!