Some Business Math

So coming into 2015 I (as most businesses do, really) have to take a long, hard look at my finances and how things are working out for me.

I know most of my readers are not business owners, but I find the math behind it all to be somewhat fascinating (plus it's a good reminder not to slack in your math skills?) and since it's the most horse-related thing I'm doing today, here we go!

My lesson numbers have fallen off a bit over the last month. Most of that is my own fault (I've only had two working weekends this month!) but then part of it seems to be that nebulous sense of... well... some kids just don't fall in love with horses and stay madly in love with them for the rest of their lives. A lot of kids end up preferring Barbie ponies to the real, stomping, difficult-to-steer, smelly thing.

I'm looking into a few different venues for advertisement. To assess whether or not my advertising is really worth the dollars that have gone into it, we'll perform a Customer Acquisition Cost (CAC) assessment.

CAC = Marketing Campaign Costs / Customer Acquisition 

CAC = MCC/CA

There's a much more complex equation that takes into account wages, professional services, overhead, cost of software, etc, but for now, I think this will work.

My MCC includes my website, my blog, flyers, gift certificates to PTAs, and I'm looking at including some ads in local newspapers. (And my riding boots, thus far my only successful bit of advertising, but such is life I suppose.)

The website runs me about $350/year, the blog is about 4 hours a week (don't forget to take your own time into account when you calculate these things!), I've only spent about $20 on flyers, about $100 so far in donations to PTAs, and I haven't run any ads yet.

Therefore for the year, it looks like my MCC is approximately $1875 (I assumed I'm worth $10/hour when working on this blog, and keeping my publishing schedule to 35 weeks a year).

We use total customer acquistion when coming up with our CA - in the time that I've actually been looking at my advertising, I've stumbled across or acquired four new clients.

That means my CAC is about $468.75

That's the first time I've run that number and I'm pretty surprised by it! I didn't realize how much went into my clients, largely because I don't generally account for my own time. But I just admonished you, my reader, to value your time, so I will too.

Okay. So we've come up with that number, but we're far from done for the day! How much should I spend in 2015? How should I spend that money? How do I assess my advertising?

We'll start with the first question. There's another number referred to as our "allowable acquisition cost" which is approximately 1/3 our lifetime value of the client.

The LTV (lifetime value) is calculated thus:

LTV = ((Transactions per month * Average order value) * Average Gross Margin) * Average Client Lifetime in months

LTV=((T*AOV)AGM)ACL

Turns out that this digs up a whole other pile of calculations. The first two bits are easy - lessons are $65 and most people ride four times a month. The average gross margin is the percentage of money that I get to keep after expenses. 

Lessons at Los Gatos are a 60/40 split, meaning I make $40 for every lesson I give. However, there's a gas cost associated with getting there, along with a pile of other, smaller expenses that I'll blithely ignore. 

Gross Margin % = (Revenue - Cost of Goods) / Revenue

Gross Margin % = (65 - (25+6)) / 65

Gross Margin % = 52%

When I was running these numbers in my head, I estimated about 50% as a AGM, so we're pretty good here!

Next we  have to look at the average client lifetime. This was one I might have grossly overestimated in my head. I said about 18 months is the average lifetime of a client, mostly because historically that's been true for me. Actually looking at 2014's numbers (although many of my clients seem to like me and don't seem to be leaving, but the numbers are what they are) my ACL is 5.8 months.

I calculated that by writing down the name of every client I've had at LGF and how long they've ridden with or how long they rode with me. Then I added all those months together and divided them by the total number of clients.

Let's calculate lifetime value for my clients as it stands:

LTV=((T*AOV)AGM)ACL

LTV=((65*4)*.52)*5.8

LTV = $784.16

Apparently the magic ratio of lifetime value to customer acquisition cost is 3:1, meaning I should spend about $261.39 per client acquisition. 

All this to determine I've been WAY overspending! 

So how do we assess the spending thus far? I generally rely on the 80/20 rule, which says that 20% of the input is responsible for 80% of the output. 

As I mentioned earlier, the only real method that's successfully got me any clients has been wearing my riding boots places (grocery stores, coffee houses, etc), so really assessing my advertising isn't something that's beneficial at this point. 

We'll reassess in a few months with a more focused advertising effort. Perhaps next time I do the math, I'll decide that the blog is a personal effort and not a business effort just to make the numbers nicer! 

Any questions?