Partnering with our article on the value of keeping a client for one extra month, we're giving you a tool for calculating your own break even point and profit margin per customer. This will make it easy to visualize the difference one extra month of client retention makes on your profits.
There are three tabs located on the bottom of the Excel file. These are "Quick Estimator", "Basic Calculator", and "Advanced Calculator". The sections in yellow are meant for you to enter data. All sheets start with sample values filled in. Please delete the values in the yellow cells, and add your own. We'll start with the Quick Estimator first.
This is the most basic and simple method of seeing what keeping a customer for one extra month means to their profitability. It is meant for people who may not have access to accurate numbers, or who want to get a "ballpark" estimate quickly, focusing on the numbers which effect the most influence. We'll give a couple strategies for increasing the profits from each customer as well.
For fun, you can run this estimator with your "best guess", and then run one of the 2 full calculators afterward. Often, you will be amazed at all the costs that you forget unless you do a line-by-line analysis.
The Quick Estimator focuses on five fields only. The first two will make up the costs for making someone your customer. On line 24, enter the total cost for all the leads, prospecting, networking, research, and travel to gain 1 new customer. On row 27, enter the total dollar value of all the time spent entering the new client in your system, setting up their reporting, doing strategic research on their account, etc. The total of lines 24 & 27 will give you the total cost of gaining a client.
A huge portion of the acquisition cost is likely to be in the research, presentation, and planning stages. That's one of the biggest reasons clients were asking us to develop white-label (you put your logo on it and give it to your customers) reporting. SpyFu's Recon SEO Dashboard Report gives you valuable background research and positioning information on potential clients, while saving you hours of research.
Next, on lines 37, enter the amount that you bill the client per month, and on line 34, the amount that you pay other employees and services out of that billing. This leaves you with your take-home for each month.
Finally, on row 39, enter the average number of months that you retain a client for at your firm. Now you'll have what your estimated profit for this customer is, as well as what difference one extra month of billing makes in your overall return on the client.
The first section focuses on acquisition costs of a new customer. Since it's easier to treat all your networking as one total, rather than detangling each customer, we'll average. Enter the total number of hours spent in a month in row 24. It is possible that you do no "networking" to get clients. However, you spend hours posting on various forums to establish yourself as an authority, and you get clients because of this. You would want to count that time here. It's also possible that you have gained enough momentum that your clients find you, if so, then it is OK to put a zero in this field.
Then, add in your presentation and travel expenses for the month on row 25 (don't forget to add in your personal time to this as well). On row 26, enter your personal "hourly rate". This may not necessarily be what you charge clients, but what you feel your time is worth. If you charge $100 hourly, but you only bill for half the number of hours you actually work, then your hourly is really $50. Finally, enter in the number of clients gained from prospecting.
Next we cover onboarding costs. On row 31, enter the total cost of creating an account in your business software, setting up billing and payment, etc. Include the cost of the labor involved in this, as it is part of the cost. The much bigger portion of onboarding is the "secret" labor that you do behind the scenes. Your doing extra research on the account, looking for the most effective ways to attack the most profitable keywords, creating new reporting... and you're not going to stick them with the full bill for the attention you're giving them in the first month. Enter the total number of hours spent on planning, research and setting up reporting on row 32.
All this adds up to the total one-time cost of gaining a client. You can see this total in row 35. Often, this number is much bigger than you'd think, because in the process of actually doing the work to gain a client, you don't stop to add it all up.
Congratulations! You've bought a client. Now to start making your investment pay off...
We'll start by adding one last expense into the mix. That is your resource cost. This is the percentage of what your costs are compared to what you bill. So if you farm out much of your work, the rate you pay others is included here. Additionally, make sure to add in your rate too! Add this percentage into row 40.
Now we get to find out the break-even point, when you will finally make your first real dollar from your client. Start by entering your monthly billing for the client into row 44, and you'll see the months to break even appear in row 45.
Next, we'll expand the scope of the calcuator a little bit, and look at the larger impact on your business. Enter the average number of months that you retain a client into row 46. This will give you two new numbers. In row 47, you'll find out what your average profit would be if all your customers were gained and billed in the same way. If your average retention doesn't cover the cost of gaining a client, you may be bringing cash through the front door, but it's being spent in time that you could be doing more profitable things!
The other new number is in row 48. This shows you the difference in profit one extra month of retention will make. If your average contract is 6 months, and you engage each client for an additional 2 months, you've just made a huge impact on your profits. This is one area where using Recon reports can help. By showing areas of opportunity that are still available at the end of a contract, you control the discussion about the value in additional projects. And keeping track of those projects using the Keyword Ranking Report takes just one more step!
The final number in the calulator really drives home the impact that keeping that client one more month makes. It shows you what the difference in profit margin you make if you get that one extra month from each customer. The more expensive your clients are, the higher this % is likely to be.
Hope you enjoy the tool, and play around with the numbers to ask your own "what ifs". What if you could decrease the cost of setting up your own reporting? What if you moved your average retention up a month? Have fun!
This follows the same format as the Basic Calculator, but I'll discuss the differences below:
In acquisition cost, we've broken this down a little further, and are treating this on a "per client" basis, instead of as a group in the basic calculator. We've added a cost per lead, as some businesses are high-volume, or pay for high-quality leads, in addition to networking. We've changed the number of clients gained to a close rate on the leads.
Onboarding remains the same. In the retention section, however, we're doing something different. In order to show the benefits of growing your client base (and average retention is a huge help), we're going to also assign each customer a portion of the costs of you running your office. We're going to add in a crude overhead cost component to this calculator. The true best way to do this would be on an hourly basis, but assigning fixed costs to customers will work also. So in addition to the expenses of generating monthly work, in rows 42 and 43, enter in your overhead costs (from your accounting software - rent, electricty, etc.), and the number of clients you are currently working with.
Enjoy the tool!