PROFITABILITY RATIO FUNDRAISING

Accelerate your business with these expert tips on "Capture Profitability Ratio". Analyse and discover this TIP!

WHAT IS IT?

It is an indicator that shows us the profitability of our recruitment efforts, or in other words, for every euro invested in recruiting teeth, how many euros we obtain.

WHY IS IT IMPORTANT?

It is one of the most important metrics in any business model with a paid growth engine (the 99%), as it tells us in a very simple way how the recruitment process is working. If it goes down, bad (indicating that we are either spending more money on attracting more customers but not more profitability or that we are spending the same amount and our margins have deteriorated). If it goes up, good (either we are spending less money on attracting customers while maintaining profitability, or by spending the same amount we have improved profitability per customer, perhaps because recurrence has also improved).

HOW IS IT CALCULATED?

For example, a quotient of 3 would mean that for every euro invested in acquiring customers, we are getting a gross return of €3 for every euro invested in acquiring customers.

REFERENCE

WHAT IS IT?

It is a metric that indicates the number of new customers that come because an existing customer has brought them, basically known as "word-of-mouth" and more recently referred to as virality. Its application and relevance depends very much on the business model, but to a greater or lesser extent all models are susceptible to some degree of referral.

Why is the cost-effectiveness ratio important?

The main reason why everyone is so interested in improving referral or virality is because a "referred" customer is a customer who has not cost us any money (directly), which significantly lowers our customer acquisition cost (CAC)... and therefore makes our acquisition trichine much more efficient. The acquisition profitability ratio is important because it shows the profitability of a company's acquisition efforts, i.e. how much money is earned for each euro invested in customer acquisition. This metric is particularly relevant for business models with a paid growth engine, as it provides insight into the return on investment in advertising and marketing.

If the acquisition profitability ratio is low, it indicates that you are spending more money on attracting customers than you are getting from them in terms of profitability. On the other hand, if it is high, it means that you are getting more return per euro spent on customer acquisition. To sum up, This metric helps to assess the effectiveness of recruitment strategies and to make informed decisions about marketing and sales budgets.

How is the fundraising profitability ratio calculated?

Benchmarking is not exactly the same as virality (in that virality is somewhat more "intentional" in that it usually requires active effort), but we can use metrics such as the Viral coefficient or k-factor to measure benchmarking. Formally it is:

Benchmark = customers attracted by OVOS customers / total new customers

The acquisition profitability ratio is calculated by dividing the customer lifetime value (LTV) by the customer acquisition cost (CAC):

Capture profitability ratio = LTV / CAC

LTV refers to the monetary value that a customer is expected to generate during its life cycle with the company, while CAC measures the cost of acquiring a new customer. By dividing the LTV by the CAC, we can determine how much return on investment (ROI) we are getting from our recruitment efforts and whether or not the recruitment process is profitable. If the acquisition profitability ratio is greater than 1, it means that we are getting more value from the customer than we are investing in acquiring them, which is desirable. If the ratio is less than 1, it means that we are spending more on acquiring customers than we can expect to receive from them over their lifecycle, which may be a cause for concern and strategies should be sought to improve the cost-effectiveness of customer acquisition.

Practical examples of cost-effectiveness ratios for fund raising

Here are some practical examples of the cost-effectiveness ratio:

1. A software company offers a monthly subscription of $20 to its customers and has a CAC of $100. If a customer stays with them for 2 years, the LTV would be $480. Dividing the LTV by the CAC gives an acquisition profitability ratio of 4.8, indicating that for every dollar they invest in acquiring a customer, they get $4.8 in profitability.
2. An online shop selling beauty products has an LTV of $300 and a CAC of $50. Dividing the LTV by the CAC gives an acquisition profitability ratio of 6, which means that for every dollar they invest in acquiring a customer, they get $6 in profitability.
3. A digital marketing company offering online advertising services has an LTV of $10,000 and a CAC of $2,000. Dividing the LTV by the CAC gives an acquisition return ratio of 5, indicating that for every dollar they invest in customer acquisition, they earn $5 in return.

In general, an acquisition profitability ratio greater than 1 indicates that the company is making a return on acquiring new customers, while a ratio less than 1 indicates that they are spending more money on acquiring customers than they are making a return.

Profitability quotient of attracting known companies

Some examples of the profitability ratio of fundraising in well-known companies are:

1. Uber: In 2019, Uber's uptake profitability ratio was 0.71, meaning that for every dollar they spent on acquiring new users, they earned 71 cents. This indicates that Uber struggled to be profitable in terms of user acquisition.
2. Facebook: In 2019, Facebook's acquisition profitability ratio was 5.47, meaning that for every dollar they spent on acquiring new users, they earned $5.47. This indicates that Facebook had a high level of profitability in terms of user acquisition.
3. Amazon: In 2019, Amazon's customer acquisition profitability ratio was 1.77, meaning that for every dollar they spent on acquiring new customers, they earned $1.77. This indicates that Amazon had a moderate return in terms of customer acquisition.

It is important, note that the capture profitability ratio can vary greatly depending on the industry, the business model and the company's market timing. It is important, therefore, to compare a company's capitation profitability ratio with other similar companies in the same industry.

EXAMPLES AND CASE STUDIES:

• COLLECTION PROFITABILITY RATIO:

Suppose that a company has invested 1000 euros in advertising for one month to attract new customers and has succeeded in acquiring 50 new customers. Furthermore, let's assume that the average LTV (customer life cycle) of the company is €500. The CAC (customer acquisition cost) is calculated by dividing the total cost of the advertising campaign by the number of new customers acquired, in this case it would be 1000 euros / 50 customers = 20 euros per customer. In order to calculate the capitation profitability ratio, the LTV is divided by the CAC. In this example, the LTV is EUR 500 and the CAC is EUR 20, so that the fundraising return ratio would be 25 (500/20). This means that for every euro invested in fundraising, there is a gross return of €25 over the life cycle of the customer.

• REFERENCE:

A benchmark example is Dropbox, a company that offers cloud storage services. In its early years, Dropbox achieved rapid growth thanks to word of mouth among its users. The company offered free additional storage to users who invited friends to join the platform. This encouraged users to invite others and became a very effective strategy for acquiring new customers at a low cost. At one point, 35% of new Dropbox users came through referrals from other users.

• VIRAL COEFFICIENT:

One example of measuring the viral quotient is that of the email company Hotmail. In 1996, Hotmail launched its free email service and added a line of text at the bottom of every email sent by users, saying "Get your own free email at Hotmail". With this strategy, Hotmail was able to get its users to become brand ambassadors and promote the service to their contacts. According to some estimates, Hotmail's viral coefficient was as high as 3, meaning that each Hotmail user invited 3 other users to join the platform. This helped Hotmail grow exponentially in its early years and become one of the most popular email services worldwide.