Still talking business…

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Today’s email presents the last business key terms for a while. We could do this all year, but there’s more to explore!

Business Key Terms, Part 3, let’s go!

“If you can’t understand it, you can’t change it.” – Eric Evans.

Allowable Acquisition Cost:

Allowable Acquisition Cost (AAC) is tied to Lifetime Value in marketing.

The greater the average customer's Lifetime Value, the more you can invest in gaining a new customer, allowing broader promotion strategies.

A high Lifetime Value customer can justify losing money on the first sale, often called a “loss leader” – an attractive offer designed to start a relationship with a new customer.

When each client is worth significant future revenue, spending a few hundred dollars to gain a new customer is logical.

First, identify your desired Profit Margin to determine your market's AAC. Start with the average customer's Lifetime Value and subtract your Value Stream costs (Variable Costsfor creating and delivering promised value throughout the customer relationship).

Next, subtract your Overhead divided by your total customer base, representing the Fixed Costs necessary to stay operational over that time (this gives your net income before marketing expenses).

Multiply the Lifetime Value by your desired Profit Margin, then subtract that amount from your net income before marketing expenses.

The result is your maximum AAC.

“Any business can buy incremental unit sales at a negative profit margin, but it’s simpler to stand on the corner handing out $20 bills until you go broke.” –Morris Rosenthal.

Lifetime Value:

Lifetime Value (LTV) represents the total worth of a customer throughout their relationship with your company. The more frequently a customer buys from you and the longer they stay, the more valuable they are to your business.

Subscriptions are highly profitable because they improve LTV. Rather than relying on one-time sales, subscription models aim to deliver ongoing value and collect revenue for as long as possible.

The longer a customer subscribes and the higher the subscription fee, the greater their LTV.

“The purpose of a customer isn’t to get a sale. The purpose of a sale is to get a customer.” –Bill Glazer.

Value Stream:

A Value Stream includes all steps and processes from initiating value creation to the final delivery to the customer.

​​Think of the Value Stream as a blend of your value-creation and value-delivery activities.

Diagramming your Value Stream is the best way to comprehend it. Mapping out the steps or transformations your offer undergoes from start to finish is illuminating.

Although creating a detailed diagram of your entire Value Stream requires effort, it can help you optimize your process, improving overall performance.

The simpler your Value Stream, the easier it is to manage and the more value you can deliver.

“Great design is eliminating all unnecessary details.” –Minh D. Tran.

Costs: Fixed and Variable:

Fixed Costs remain constant regardless of the value you generate. Overhead is a Fixed Cost: irrespective of your monthly activities, you still need to pay your salaried staff and office rent.

Variable Costs are related to how much value you create.  If you bake cakes, the more you make, the more flour, sugar, and eggs you need. Raw materials, usage-based utilities, and hourly wages are all Variable Costs.

Reductions in Fixed Costs accumulate over time. Reductions in Variable Costs are amplified by production volume.

Understanding your costs thoroughly increases your chances of maximizing value creation without depleting your revenue.

“Watch the costs and the profits will take care of themselves.” –Andrew Carnegie.

Overhead:

Overhead refers to the essential continuous expenses necessary for a business to function.

This includes everything needed to operate your business monthly, regardless of sales (salaries, rent, utilities, etc.).

Lowering your Overhead reduces the revenue required to keep your business running and helps you achieve financial stability faster.

Overhead is crucial to monitor if you are starting your business with a limited budget. The lower your Overhead, the more flexibility you’ll have and the easier it will be to maintain your business operations.

“Beware of little expenses; a small leak will sink a great ship.” –Benjamin Franklin.

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Last thoughts:

We hope that all these business key terms, concepts, and example situations we explored over the last three weeks have been helpful to you in whatever stage of business you are in and as an entrepreneur.

Next time, we will go with the third more voted topic. Can you guess what it is?

-> Still, if you want any key terms explained, please reply to this email. 

The ProfitZine is here to help!

See you in a week.

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