Sunday Email - Growth like SaaS Company / Authentic

Read time: ~ 8.45 minutes

Happy Sunday!

Every Sunday I offer strategies for the week ahead and a thought to fuel your action.

1929. Not a great time for the economy. 

President Herbert Hoover was trying everything to lift the US out of the Great Depression. 

As could be imagined, there was not a magic bullet to quickly lift the economy out of such a dark economic time. 

During this time, Hoover was said to have lamented to former president Calvin Coolidge. He lamented that all of his attempts to promote economic recovery seemed to be making little impact. And his critics were becoming increasingly angry. 

Coolidge looked to Hoover and said “You can’t expect to see calves running in the field the day after you put the bull to the cows.”

Many interesting points come from this story. First and foremost, the idea of instant gratification is not a modern thing, it is a human thing! We all want results right away. 

But the bigger point for us is around the combination of actions and results. The wealth management industry constantly suggests that “growth” is our number one challenge. 

Traditionally reliant on referrals, the industry has shifted its focus towards digital marketing and advertising in the current era. 

However, much like Hoover, we become impatient for results, leading to frustration when immediate success is elusive.

For many, we get frustrated. And we stop. We throw in the towel and move on.

But there is another way to go through this process, analytically. A way that provides insights that can drive us to test different actions and analyze them, compare them and then try something else. 

It’s a matter of having a grasp on the drivers of growth. 

When I was building the technology company benjamin, I spent a great deal of time analyzing our digital advertising spend. I constantly analyzed how much we were committing to marketing and how many leads we generated. And ultimately how many clients we won.

Why? For one, we were a small startup and cash was not something that we had much of. But, this was also the main topic of conversation as I spoke to investors about when raising money. 

Investors wanted to know how much we paid for a client, how long they stayed with us and how quickly we recouped our marketing costs to acquire them. 

This was important for a company burning cash. It helped us understand that if we raise X dollars and spend Y dollars on marketing, we will generate Z dollars in revenue and this will give us a runway of ABC years. 

We now had knowledge and insight. We were able to pull levers and test new marketing ideas and compare them against our longer term benchmarks. 

The wealth management industry is evolving. We are moving into second and third generation RIA firms. 

Firms are getting smart. They are jumping into digital marketing and having success. They are leveraging other channels for client acquisition (beyond referrals) and having success. 

But more importantly, they are starting to analyze these channels and the success behind them the same way SaaS companies do. And all of the industry can learn from this. 

It is the key to being able to effectively deploy capital to see efficient growth. 

So, what are these metrics SaaS companies use? 

We will look at three of them today: 

• Client acquisition cost (CAC)

• Lifetime Value (LTV)

• Payback Period

Client acquisition cost (CAC) accounts for the costs to acquire a client and sees how many clients these costs generated. 

As we start to spend money via digital mediums this becomes an important metric. 

The equation for CAC is: 

CAC = Total marketing and sales costs (advertising costs, salaries of sales and marketing team, software tools for marketing, etc.) / new clients acquired over a specific period of time. 

When using this calculation we are looking at the total costs over the same period that we are looking at new clients added (i.e. 1 year).

And for service based businesses like wealth management this will likely be higher. Don’t make decisions based on just one number. 

Lifetime value (LTV) is a metric that will help us see how much each client pays us over the time they are with us. The retention rate of clients here is super important. And as we will see, the better this number is, the more we will be willing to pay for each client. 

The equation for a LTV is: 

LTV = (Annual fee of client - annual cost to serve clients (includes operations costs, technology costs, etc)) x average number of years a client stays with your firm 

The cost to serve a client number can be valuable in many realms. We can look to this number to see if we are becoming more or less efficient at serving our clients over a period of time. The goal is to drive this number lower. 

The final data point is payback period. This shows how quickly we will get paid back for acquiring a new client. Ultimately, we want this number to go down over time. 

The equation for payback period is: 

Payback period = CAC / Average Fee

And this will give us a number of years or months that it takes to get paid back. And we will now be able to see how many years of profitability we have with each client. 

Let’s look at an example: 

Growth is a challenge. It’s not just hard in our industry, it is hard in life and in all industries. 

Our industry is maturing. And our processes and way we analyze our business should mature as well. We aren’t selling software, we are selling a personalized service. Yet, both us and software businesses want to acquire new clients. 

And we utilize many different mediums to acquire clients. So, for us to not get upset with results, we should leverage data points to give us insights. And as we see certain channels providing less, we now have the tools to analyze why. And we can make adjustments and compare. 

These are tools, yet they have been proven to work for others. Maybe there is something we can all take for our own business. 

A Thought To Ponder This Week

Warren Buffett's story is well-known.

Despite being worth billions, he has lived in the same house for over 60 years, a home purchased in 1958 for $31,500 (around $323,415 today).

Buffett's wisdom and occasional luck have captured our attention, but it's more than that. Many of us are drawn to his words, seeking that elusive formula for success. 

However, there's a deeper allure to Buffett – his authenticity.

Buffett remains unchanged by his wealth. He dines at the same local spots, enjoys his daily Coke, and is an avid reader. Amidst a world of constant change, his core self stays unaltered. 

He never aimed to create a following; he was simply being true to himself. In doing so, he achieved immense success, arguably because he remained steadfastly authentic. 

He didn't let evolving times, differing opinions, or wealth reshape his principles.

This authenticity goes deeper than his financial achievements. It speaks to the comfort of embracing one's unique self.

As we head into the week ahead, there is so much we can learn from Warren Buffett. But one thing to think about, what is one thing that we could lean into more that is truly authentic to us?  

The best is ahead!

-Matt