As business owners we typically only use a handful of metrics, or Key Performance Indicators, (KPI) to assess how well our business is doing. Most of us will look at our financial statements, which include our income, or profit and loss statement, balance sheet and cash flow statement. KPIs taken from financial statements are excellent because they are quantitative. There are no grey areas when it comes to numbers, they are what they are.
Quantitative metrics are also ideal because they can be used to compare between different time periods, and they can be used for goal setting and tracking performance as it relates to these goals. It is incredibly satisfying to compare projected to actual numbers, because even if you don’t hit your targets you have objective metrics that can be used to figure out why something worked, or not. It’s a lot like comparing blood panels and using them to track therapy on a patient.
Unfortunately, once we get past our financial statements there is very little in the way of concrete, non-subjective KPIs for our business. Marketing is a great example where measuring the results against the costs involved can be very difficult. A discussion at our recent Oculus Insights Veterinary Business Management Summit in Jerez, Spain shed some light on this.
“Is Facebook worth the time and money ?”
During one of the presentations we began discussing the importance of Facebook and other social media platforms. Everyone agreed that they needed Facebook, so I thought I would ask the group several questions to challenge this apparent necessity. Why do you need it? How do you know it works? Is the expense worth the return?
I asked these questions not to be a jerk, rather because they highlight a challenge that marketers across all industries face, and that is tracking the return on investment for marketing efforts. There is truth in the classic advertising adage that we know that 50% of our advertising works, we just don’t know which 50%!!!
The purpose of my questions was to encourage people to think about their goals in their use of social media and other advertising efforts, and the costs that go into achieving these goals.
When it comes to the use of Facebook in a veterinary practice there is the cost of time writing posts, taking photos, editing videos, and managing feedback and questions from visitors. All of these costs add up over a year, and unless there is a tangible return we need to ask if the expense is worth it.
Many businesses and metrics use two metrics to assess marketing efforts: Customer Acquisition Costs (CAC), and Lifetime Value of a Customer (LVC). Both are easy to figure out and will give any business objective KPIs.
Determining the CAC is as simple as dividing the total costs associated with anything a business does to promote their business in the hopes of gaining new clients by the number of new clients you have gained during a period of time. Costs can include staffing, advertising, sponsorships, swag, etc. For example, if total client acquisition costs for a business over a year was $4000 and they gained 50 new clients in a year the CAC would be $80.
This CAC could seem like a lot, but when you consider the Lifetime Value of a Client it might be a very reasonable price to pay to get a new client. Any practice management software should be able to tell you what clients spend each year on average. The harder part then is to figure out how long a client stays with your business. If your average client spends $400 every year and they remain clients for 5 years then your LVC is $2000.
By knowing the CAC and LVC you can use a simple ratio dividing the CAC by the LVC to determine the effectiveness of your client acquisition costs. In our example it would be 4% ($80/$2000). The lower the ratio the better because you’re clients are either staying with your business longer or you are using less money to acquire new clients.
In the veterinary profession it may be more accurate to figure out Patient Acquisition Costs (PAC) and the Lifetime Value of a Patient (LVP), since so many of our clients have multiple pets. If our original 50 new clients had a total of 70 pets then the PAC would be $57. Then if the average patient is billed $300 annually over 5 years the LVP would be $1500.
The question each veterinary business has to consider is if it is worth spending $57 to get $1500 of business. This is different for each business depending on their profitability. If your business has a thin profit margin then $57 might be too much to spend.
Using these metrics allows any business to dig into the efficacy of their marketing efforts. Is the PAC decreasing each year because you’re doing a better job of targeting potential clients? Is the LVP decreasing because clients are spending less on their pets, or clients aren’t remaining with your business as long.
Too often we get caught up in doing something in our business because we don’t want to feel left behind. As a result, we end up buying equipment, or engaging in marketing initiatives that don’t make sense for our business. Developing a mindset of determining and measuring goals is invaluable for any business owner or manager. Once we have a baseline metrics it is easy to compare the performance of our business over time and make adjustments if necessary to maximize our return on efforts and cost.
What do you use to measure the success of your marketing efforts. Share in the comment section or on our Facebook Page. Thanks