Our business used to be a leaky bucket. We put sales revenue in the top, but the bucket never filled. Too many holes.
So we got smart and plugged the holes.
Here are some of the biggest leaks in most businesses’ buckets.
#1: Customer Churn Costs
Do you know how much getting a new customer costs?
“Customer Acquisition Cost” (“CAC”) for an agency is typically between $200-$350. (That’s all your sales and marketing costs divided by your total new customers.)
Let’s say your CAC is $225, and your annualized commission is $175.
Then your breakeven point is about 15 months. You start making money in month 16.
Now watch this:
- At the end of 1 year, you’ve lost $50.
- At the end of 2 years, you’ve made $125.
- At the end of 5 years, you’ve made $650.
Better yet, look at it this way:
- 5 customers for 2 years = $625.
- 1 customer for 5 years = $650.
- 5 customers for 5 years = $3250.
High customer churn means your business is hemorrhaging profit. You’re working way too hard for your each dollar. Plug the leaks by engaging with customers and demonstrating care and credibility.
#2: Employee Churn Costs
When you replace an employee, you pay for:
- Their lost production
- Recruiting and hiring costs
- The cost of training and their learning curve
- The opportunity cost of your foregone sales
This could easily set you back $10K-$20K within 3 months. By contrast, paying an extra $2 per hour comes out to $1K in 3 months.
How do you plug the leak? Pay enough that money isn’t a concern. Then make the job meaningful and fulfilling.
#3: Ignoring Compounding Effort
Charlie Munger famously said,
“The first rule of compounding is to never interrupt it unnecessarily.”
Charlie was talking about interest, but it turns out the same is true with good strategic decision-making.
Executing on good strategy brings even better strategies into focus. When we stack good strategy on top of good strategy, the effect compounds over time.
But when we constantly hit reset with short-term, tactical decision making, well, we forfeit our biggest potential returns and endure slow, linear growth.
How do you plug the leak? Spend an hour a day following really smart business people and reading their stuff. Then figure out how to do what they do in your business.
Stop working harder. Work smarter. Then work even smarter than that.
#4: Competing on Price
A customer with a house, 3 cars, some toys, a small business, and financial services products can easily provide 20-30 times as much bottom line CLV as a single-line auto policy holder.
And that high-value customer is looking for value.
When we focus too much on price, we lose our differentiation and end up with a larger share of customers who don’t stay long and don’t provide us much opportunity to meet more of their needs.
To plug the leak, alocate more time to connecting with high-value customers, giving them a lot of value, and meeting the people they rub shoulders with.
#5: Obsessing Over The Competition
We don’t have any control over “them”. We don’t know much about their inner workings.
But we do have all the dirt on our own operation. We know everything that could be better.
Focusing on the competition makes us mypic and reactive. We lose our differentiation. Instead of being different, we try to be “better”. Different is better than better.
Here’s the great secret:
Plug this leak by competing with yourself. Make next-year you much better than this-year you. Do that every year and you won’t have competitors anymore.