PODCAST EP 9
What is Customer Lifetime Value & Why is Conversion Rate Important?
On Episode 9 of the Paper Planes Podcast Simon chats with Simon Bell about what Customer Lifetime Value is and why Conversion Rate is so important.Listen Now
BDO in Australia is one of the country’s largest associations of independently owned accounting practices with clients of all types and sizes.
Simon Dell: I am here with Andy MacDonell or Andrew.
Andrew MacDonell: Andy MacDonell
Simon Dell: Kiwi thing. And you are the second person of all the podcasts that I’ve done that I’ve actually interviewed face-to-face. Everybody else has been remote except for Charles from DoseMe, so you should be honoured.
Andrew MacDonell: It is an honour, thank you.
Simon Dell: First things first, let’s get an overview and understanding of what you do at BDO. Because you’re based here in Brisbane. So, you work for BDO Brisbane, but let’s find out what it is that you do there.
Andrew MacDonell: I predominantly work with privately-owned businesses and I help them out in three general broad areas. Financial education is a big part of what I do. I also work with them in a strategy space. That’s largely around strategy development, finding out where the business is at, what the owners or stakeholders really want to do, and then the other piece is strategy execution, which is really the most important piece. Once we have developed a strategy and a bit of a plan, how do we actually take off and get us there? So, that’s really it in a nutshell, in plain language.
Simon Dell: The reason for getting you in today is that we wanted to talk about what business can do looking forward to 2020. But first of all, I just want to get an understanding of, when you talk about financial education, what does that mean?
Andrew MacDonell: I guess the best way of putting it is, it’s empowering clients with the tools, the knowledge, the understanding that we possess as chartered accountants and business advisers to go off and really make better business decisions. It’s the ultimate test. And what we found….It was an opportunity that came up and they needed someone to run some sessions that we were doing.
This was back when I was working in New Zealand, around colour accounting, and it was a, “Let’s just see how it goes.” But what we found out is that, all of a sudden, the conversations were elevated. Clients were coming to us with a lot more pointed sharp queries around what they wanted a hand with.
Because before then, it was a case of, “Well, you just don’t know what we don’t know, Andy. Tell us what we should do next.” So, really, it just lets the whole thing out and allows us to work at the sharper end with clients, really.
Simon Dell: We met through a government mentoring scheme here in Queensland, Australia. It stuns me every time I sit down with….Or perhaps it doesn’t stun me because that’s the wrong way, because I know how bad I was when it came to financial education and financial management in the early part of my business career.
But it’s amazing the lengths that some people have gone to in building a business without any real understanding of a lot of the financial side of things. I mean, I met agency owners, three of them, who couldn’t read, who didn’t understand what Xero did, couldn’t understand what a PNL was. Do you see a lot of that?
Andrew MacDonell: Absolutely. And part of it is the industry that we come from as charted accountants traditionally. We do a really good job. We pride ourselves on our technical ability, and our skills, and our accuracy, and getting a good tax result, and all these things that I guess we’re really well known for. But we do it behind closed doors. So in other words, in a really traditional sense, you’ll catch up with an accountant once a year. “Here’s my year in information.” Great, go away and do what you do. That’s the tax I want to pay, all too hard because I’m running a business. Tell me what I need to do and see you next year, and please don’t charge me too much. That’s the traditional relationship.
And what we find through that is that, whether they like it or not, day by day, they’re making financial decisions. They just don’t know it. I guess it’s really around empowering them with a lot of, what I would classify, as management accounting skills. It’s that ability to see day-by-day, week-by-week, month-by-month. “Okay. This is the data. This is what we were at. This what we get out of Xero or whatever accounting platform we’re on.” What does it all mean and what the hell do I do next?
Simon Dell: And I guess for me, there are some key numbers that everybody ought to know. And I’m not going to put you on the spot because I understand all businesses are different, but the things that I try and look at when I look at other businesses is, number one, what your revenue is. That’s obviously an important factor. Number two, what your cost of goods are. Explain to people what a cost of good is.
Andrew MacDonell: Cost of good, goods sold, or cost of sales or directs costs….We use all these different terms. They’re costs that are incurred with each and every sale, effectively. So, they go up. If you sell more, your cost of goods are going to go up proportionately as well as opposed to overheads which largely, to a point, stay flat. You’ll obviously get to a point in your business, particularly if it’s growing…There’s only limited capacity, and those overheads might need to step up, but in a month by month, they’re going to largely stay flat. Cost of goods sold are going to largely increase in line with your revenue. And that’s probably the key difference.
Simon Dell: So, in a business like outs, it’s all about if we contract something out, if we use contractors, that’s a cost of goods?
Andrew MacDonell: Correct
Simon Dell: If you’re a manufacturer, it’s about the people that supply you the products to manufacture your end.
Andrew MacDonell: It’s the cost of your widget but it’s going further than that as well. And it’s saying, “Well, what else actually happens each time you actually sell something? Are there some transaction fees involved each time you sell?” Well, okay, if I’m incurring this with every sale, it’s a direct cost, isn’t it? So, let’s make sure we bundle that in there.
I think the other thing as well, particularly with privately-owned businesses is, where are the owners really putting their time. Is it largely management? Is it more of a mixed arrangement where they’re actually client facing as well? And has some thought actually been put into that to say, “Well, actually, 30-60% is actually revenue-generating. Well, let’s make sure that we carve that percentage of the salary and actually put that up as cost of goods sold.”
And why that’s important is that, otherwise, we’re just kidding ourselves around what our margin is. It makes it very hard then to plan and say, “Well, jeez, if we want to grow this, if we want to double our business in the next couple of years, it’s really important we know what costs are going to be associated with doing that.”
Simon Dell: So, you’ve got revenue. You’ve got cost of goods then you’ve got expenses. As you said earlier on, expenses are items that should remain relatively static month in month out, even though the business might be going up and down.
Andrew MacDonell: Yeah, 100%. And traditionally, particularly if we’re looking at this under a tax lens, that’s going to be a big, long, scary list of expenses that your accountant’s going to give you, and they’re probably not going to put a lot more thought in it rather than saying, “Well, I’m going to alphabetize them.”
That’s not really too useful if you’re trying to understand, “Where do I cut costs? How much am I spending on admin? What’s HR? What’s my overall marketing cost? If I have to actually go through and pick all this stuff out. Particularly from an education lens, we work with clients to get it into a format where, “Okay, as a business owner, what does my PNL actually need to look like to be able to make some decisions off the back of that?”
Simon Dell: So, you’ve got revenue, you’ve got costs of goods, you’ve got expenses. And then obviously, the number, the bottom of that, should be revenue minus your cost of goods, minus your expenses, is your net profit.
Andrew MacDonell: Correct.
Simon Dell: Okay, and obviously, that is a number that we look at every month. It’s about making sure that it’s not constantly in the red or those things.
Andrew MacDonell: It is, but it’s also about managing it to make sure: What is the profit that you want to be making out of this business? And I think probably too many business owners, they get to a point where it’s just like, “Oh, it’s really hard. We’re going to work our backsides off.” And I’m really focused on the revenue piece, but they haven’t really given any thought to: What is the profit that they need to generate? What should it be?
Simon Dell: So, I guess that’s my question now, which is: How much should a business be making from a profit perspective? And I know that’s the million-dollar question. And I also know that every business is completely different. But are there any benchmark metrics that you use in your head to say, “A good business should be making 10 to 15% profit.” What would you be looking at?
Andrew MacDonell: You look at a couple of things. If it’s an owner-operated business, first and foremost, have they actually got a market salary within their profit loss?
Simon Dell: So, that means that they’re being paid a salary out of the business in the same way that…
Andrew MacDonell: Exactly. And they need to say, “Look, imagine I’m no longer in the business and I have to pay someone else to do my role. I have to pay someone to manage the business, lead the client engagement, whatever else is involved in their role.” So, if that number is not in there, again, they’re kidding themselves.
Simon Dell: Again, let’s just use an example. If they’re turning over a million dollars, their net profit at the bottom of the year is $100,000, $70,000, but they haven’t taken the salary. Essentially, that $70,000 is their salary. And theoretically, the business has made no profit.
Andrew MacDonell: Correct. And so then, once we’ve identified what the owner’s learning in so far as the market salary, then we look at the risk and we say, “Are they actually generating a profit on top of that salary that’s commensurate with the risk that they’re taking, with what they’ve invested in the business, with the size of the business?” And then we can start to have a discussion in saying, “What do you want that to be?” Where do you want to take this business?
That’s a really interesting question to ask. And sometimes, you’ll get an answer straight back, “Geez, I don’t know. Where can we take it?” And that’s where we can start to get into some real strategic planning with the business to say, “If we want to implement a growth strategy here, what else does the business need to deliver to make sure it delivers on their owner’s end?” That could be retirement plans, exit plans, how much do we want to sell the business for?
Do I want to put the kids through uni? Do I want to generate something else? So, it’s understanding all those wants and aspects that you really want as part of a privately-owned business and then putting a plan in place.
Simon Dell: If you had to pick a number and you were looking at someone’s PNL for the first time, let’s say it’s a small medium-sized business, up to 20 employees, the owner’s taking a salary, they’re paying themselves six figures. What’s a healthy profit?
Andrew MacDonell: It’s looking at it in a percentage term and saying, “Well, you’re taking on all this risk and all this pressure of running a business.” If we look at the investment that you’ve got in the business, if that net profit figure that’s coming out is 2-3%, you could take this, you could quit, you could get yourself a job. Someone else has to take the risk and rewards of ownership, and you can actually take that investment and then put it into other investments and generate superior return.
That can be a good way to start, get them thinking, saying, “Gee, you’re right. It’s a lot of shit here, Andy.”
Simon Dell: Yeah, for 2-3% profit, it’s a lot of stress.
Andrew MacDonell: Exactly, so you know does it need to get up towards 5 or 10%. And then where that becomes a little bit convoluted is, there’s no real set percentage for it because it depends a lot on scale. I know some business owners that are generating 5-7% net profit, but it’s a big number. Their overall gets them upwards of $500,000-700,000 per owner at the bottom-end.
And they’re earning that reliably now, and that’s allowing them to just do what they want to do. Don’t get me wrong, it’s been a lot of years of hard work to get there. But now, it’s starting to generate a really good return. Likewise, at the other end, I know people where the business is largely reliant on them. There might be some additional contractors in place, and all of a sudden they get something that might be closer to 20% dropping at the bottom, it’s nice and lean, it’s niche.
Simon Dell: We could talk a lot about strategy development, strategy implementation, but what I’m trying to get out today will be to say to people who are listening who might own a business, that there’s maybe two or three things that they ought to look at for next year in terms of… And I really want to focus on businesses that want to grow rather than ones that, if you don’t want your business to grow, then why are you listening to this podcast?
But what would be the key things that you would say to people that they ought to look at from a strategy perspective in 2020 in order to grow their business?
Andrew MacDonell: First and foremost, it’s good that strategy is on the agenda now. There’s so much change going on. There’s a lot of opportunity. It’s become a focus again for a lot of business owners. I think first and foremost, making sure that you’re working through a process that actually understands where the business is at. If there’s multiple owners, stakeholders, where their views are at, and ensuring that you’ve got a level of alignment and understanding of those issues before you jump into a strategy session.
Because too many people, “Oh, yeah. We’ve got to do a strategy. Alright. Let’s go get someone and let’s have a great whiteboard session. Let’s go and do a workshop.” Fantastic. And it’s a lot of fun to do, but they can struggle in terms of being able to get it off the ground because no one actually took the time to say, “Where are we at? How do we actually connect the strategy back to where the business is at today?”
Not some pie in the sky where we really want it to be. That’s a really important aspect of the process.
Simon Dell: I think having that endgame in mind is… We did a session with a company two weeks ago, three weeks ago, and it’s so hard for us to sit there and go, “Here’s what you should be doing from a digital marketing perspective.” If we don’t actually know where the hell they’re trying to get to. And to be honest with you, even a pie in the sky objective would have been helpful to us. But we’re going, what sort of growth do you want? Do you want 10%? Do you want 20%?
And without knowing where they’re trying to get to, building a road map is literally impossible. You can’t build it. You can’t build a plan or a map to get to somewhere if you don’t know where you’re trying to get to.
Andrew MacDonell: That’s right. It’s about doing that. And part of that process, it’s also understanding, “What are the markets and opportunities that are open to the business?” Because strategy, a big part of it is about choice. It’s about drawing a line in the sand and saying, “Well, look, we can’t be all things to all people. We can’t spread ourselves too thin and hope to score goals everywhere. It’s been useful to get us to a point. But now we need to get really clear on what the priorities are and why.”
A lot of that is around market evaluation, but it’s also tying it back and understanding, “Where does the business have a right to win?” Where are the inherent skills and capabilities that really match with that market? And then drop out a really good value proposition that makes the whole thing come together.
And when you look at strategy, and you have this opportunity that I do to sit across a number of business, and develop, and help them execute, is the beautiful ones are about coherence. It’s about where the whole thing comes together and it just makes good, logical sense. You’re not off chasing rainbows or playing in markets where you don’t necessarily have a right to win.
And why businesses trip up on that is because they’re thinking growth, growth, growth. And yes, that’s sound. But where it leads you is that you just spread too thin. You end up in playing in markets where, actually, if you’re really honest about it and you look back in it, you never really had a right to win.
Simon Dell: So from an implementation point of view, let’s assume people understand their financials. They’ve got the strategy in place. Talk to me about what that implementation actually means. Is that something that you guys help people with, or is it something that they’re looking at — it’s better that they drive it internally?
Andrew MacDonell: Absolutely, we do. There’s three levels I look at in terms of execution. And I guess the other part of execution, just before I get onto those levels, is we’ve got to have really good data to be able to assess where the business is at compared to the plan. That’s a little bit more than just actual versus budget. That’s an important part of it in terms of the numbers side of things. But also, what are the other critical KPIs and lead indicators around executing the strategy? How do we capture that data, monitor it, and make sure it’s meaningful?
In terms of how we work with clients, I like to do a lot of business mentoring. That’s one-on-one with a business owner, catch up once a month. Let’s have a look at where we’re at in terms of the plan. Let’s have a look at the financials. Let’s discuss what’s front of mind. What are your top issues that you’re really challenged with? And give them some good clear insights and advice on how to get over that and how to best manage that.
And then always making sure there’s no more than three big things that they have to go away and think about for the next month. Catch up. Next month, how’d you go with that? And all of a sudden, those meetings build a regular cadence that they start kicking some goals and achieving it.
Because for businesses to grow and succeed, and unfortunately there’s no silver bullet, it’s usually 101 little things that need some tweak and focus that actually get the business to a point where we’re starting to kick goals. That’s part of it and that works really well for 101. We can then step up to business management meetings, really good — a couple of owners or if there’s some key management people that we need to bring into the fold as well.
We have a little bit more of an agenda. There’s KPIs and some proper management reports that give us everything we need to go through, and then we check on that. We’re living and dying by the budget here. Is this this real or do we actually need to re-forecast? One of the top challenges, again, how do we diagnose that? But also bringing in other things like annual checks? What are we doing in terms of HR, staff reviews, staff performance. Are they empowered or are they on the journey with us?
It has a little bit of a regular agenda, and then we can go right through to an advisory board as well. I get to chair a few of these, and that’s about, “Okay, we’ve got the business owners. We’ve got myself as chair. My role largely is to have the owners, the founders, the CEOs back, whoever I’m working with. And then let’s go out to market and say, “Who are the other experts that we need around the table? Do we need some legal expertise? Do we need some marketing expertise? Are we talking about building a global brand here? Are we talking about expanding out overseas?””
Of those three solutions, it’s about getting the right fit for the agent stage of the client in terms of what they need.
Simon Dell: A couple of things you said out of that. I think number one, that 101 little things idea. That concept that there is nothing that you can do tomorrow that’s going to change the business. And also saying that even if you can make 101 little changes tomorrow, it’s still not going to… It’s about making those over time.
Andrew MacDonell: That’s right.
Simon Dell: That’s really important for people to understand, that there isn’t a major thing that you can do tomorrow to change everything. The second thing that I think is important, that I was going to ask you about, is this concept of an advisory board. Because this something that’s cropped up that I’ve heard a lot of in the past year, and I think it’s become a bit more of a thing. Explain to me the benefits of having an advisory board and how you would go about finding these people.
Andrew MacDonell: Where advisory boards come from is working with advisors in a relationship to help business owners make really good business decisions. That’s the crux of that. And what’s unique about privately-owned businesses is they can’t go to market and afford the C-suite, six-figure non-Director. It just doesn’t work for them. Likewise as well, they need people that can think a little bit more strategically, flexibly, as opposed to, “This is a full-on governance process. Let’s wrap it all up in red tape.”
That’s part of where it’s come from. In terms of advisory boards, they are becoming popular. Again, it’s probably a reflection of the times where there’s just so much opportunity, so much change out there. How can one business owner ever be expected to navigate all of this? We need to bring in some external expertise. I work with the Advisory Board Centre here in here in Brisbane, so I’m a certified chair with them, and we catch up quarterly, and we have our range of cheers, advisors, experts from all professional realms.
We really promote this practice around advisory boards, and I think that that’s really important. It should involve, first and foremost, a chair. And that’s a really important position. They’ve got to be strong. First and foremost, they’ve got to have the owner’s back and they’ve got to maintain a level of independence. Otherwise, it just becomes another advisory link.
So I go, “Simon, yeah, I’ve got your back. Do you need a hand with that forecast. Let me go and do that for you and let me do this.” All of a sudden, over time, you can actually get a little bit conflicted in so far as, “Am I always the best person to be giving you that expert advice and those insights, and do I actually end up earning more fees off the off the back-end work or actually helping you?”
You can lose sight of where you want to go, particularly where there’s… It’s a large decision or it’s a significant remit for the business. That might involve expanding overseas, succession, a significant additional investment, whatever it is, and making sure that we’re bringing best-of-breed around the table who have been there. That can include other successful entrepreneurs. It can be quite common that a business owner will just want someone who’s been there and done that before.
Simon Dell: So, your advisory board, is that getting together once a month?
Andrew MacDonell: Yeah. A traditional format would be monthly. You’d work predominantly with the chair in those first three months for a bit of board readiness. That’s understanding: Where’s the business at? How do we need around the table? What are you trying to achieve? What does that look like? How well are you — are you set for growth as well, if that is your objective? And then developing a remit.
Advisory boards need a really clear agreement to really instruct, “What are we doing?” We’re doing more than just catching up once a month, and having a chat, and throwing around all these flash business ideas. We’ve actually got to go through a bit of a process here to manage and get the best outcome for our client around a specific situation. It’s doing that.
And then it’s going to market and saying, “Right. We need an advisor who’s an expert in this piece or that.” And then we can go and bring them to the table and go to it from there.
Simon Dell: Obviously, it’s going to sound a stupid question, but I assume people are paying the advisory board for their time?
Andrew MacDonell: Yes, they are.
Simon Dell: If I’m a small business and I want to put an advisory board together next week, what’s that going to cost me?
Andrew MacDonell: Prices do vary. I guess with the Advisory Board Centre, I’ve heard around $1,000 to $2,000 per month depending on what’s involved. You’ve got to understand: How much time is it taking? How much additional research and preparation is involved, ongoing contact and calls? But then it’s more, how big is the advisory board? What does it grow to? Some of them will have right up to $40,000-50,000 per annum budgets for that sort of stuff to be able to get the right people around.
It is at that level, when you’re really bringing in additional experts, it is a bit of a premium level offering. It’s testament to the fact that they work really well and they deliver some great outcomes for clients.
Simon Dell: You talk about startups and small businesses. Do you think there’s advisors out there that might come on in terms of — for a share of the business or something like that? Obviously, they’ve got to see the opportunity for the growth that they’re going to make that, they’re going to convert that time into money later on down the line.
Andrew MacDonell: Absolutely. That’s another thing that the advisory board seem to do as well. There are pro-bono engagements. I’ve been involved in a few. There’s this other idea as well of what we call a pop-up advisory board, that effectively almost works as a little bit of a panel, and it’s there to catch up once a month for three months to help guide thinking, guide the pitch, guide the development, guide the next steps of strategy, and help the business out that way.
There is flexibility in the process. But again, it really comes back to understanding, “What is it that you want to achieve?” What’s the advisory expertise that you’re really wanting to understand? And I think that’s where… Advisory boards have great ideas, but you’ve got to go through that process initially of understanding, “What are we trying to do here?”
Otherwise, you run the risk of, “Well, we’ve got some advisors in the room and we’re catching up for a chat. We’re putting some things up on the whiteboard, and every month it’s different. But are we actually getting anywhere?” The value of it really comes back to the process.
Simon Dell: Let’s wind this up with my last question about 2020. It’s a big year next year. If you’re sitting there listening to this and you’re thinking, “I want to expand my business. I want to grow my business.” And we don’t know what those businesses are. It could be e-commerce. It could be a service-based business. It could be whatever it is. What are your main tips to say… What’s the first two things they should do come 1st of January next year if they’re serious about growth?
Andrew MacDonell: If they’re serious about growth, I think don’t try and do it all by yourself. There’s a lot of value in terms of getting some independent expertise and critical thinking around your thoughts. Great, you want to grow. I’m more than happy to help you out with that, but how we going to do this? What areas are we going to look at? What’s the business model that we’re going to choose?
And just being asked those questions from someone who’s been there, done that, but also seen a lot of different businesses, business models, business owners, try to do this sort of stuff, is really valuable. I think engage with an expert, first and foremost. Ensure that there’s a bit of planning process that takes into account where you’re at and then can marry that up with where you want to go.
There’s a good clear line around how we’re actually going to do this. Too many businesses you see, even when they go through a budgeting process, it’s like you haven’t unpacked the assumptions enough. Again, that’s really hard to do by yourself. You sort of think, “Well, I’m a business owner. I’m going to put the pressure on myself. I should be here. I should be generating this sort of return. To do that, I need to grow…” Okay, we’re going to go off and do this.
There is a bit of an art and some good process that needs to go behind that to make sure that ultimately it’s feasible. And I think, probably the other thing as well, is just include the team, include your business partners, include the other stakeholders in this journey. Don’t go off and develop a plan by yourself in isolation and say, “Well, I’m the majority shareholder and I’m going to go and do this. Everybody else is just going to have to fall in line and follow me because this is my year and I’ve decided to do that.”
Don’t underestimate the importance of that alignment piece, but also making sure that your team, your wider stakeholders, whether they’re employees, full-time, part-time contractors, whoever it is that you’re working with, are prepared to go on the journey with you. And understand that it’s a lot of work, but celebrate the small increments. Sometimes, it’s just the power of those little incremental improvements sustained over time that ends up to a big result in the end.
Simon Dell: Mate, thank you for that. It has been very insightful. It’s a shame we’ve only got 30 minutes, but there’s some really useful advice there. If anybody wants to get hold of you, if they want to get in contact with you, what’s the best way of reaching out to you?
Andrew MacDonell: Have a look at me on LinkedIn. Andrew MacDonell. All the contact details are there. [email protected] Always happy to come out and meet some business owners and have a chat.
Simon Dell: Brilliant. Thank you for that, mate. Talk to you soon.
Andrew MacDonell: Cheers, mate.
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On Episode 9 of the Paper Planes Podcast Simon chats with Simon Bell about what Customer Lifetime Value is and why Conversion Rate is so important.Listen Now
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