Why You Need to Calculate Your Customer Acquisition Cost as a Financial or Insurance Advisor

by Jonathan Bega

This is part one of our series on startup metrics and why financial advisors need to care. In part one, I discuss why financial service professionals, including insurance agents, wealth managers, and financial planners, should be savvy to their cost of acquiring a customer across their channels. In part two, we delved a little deeper into metrics and learnt about customer lifetime value and churn. In part three, we put it all together with a case study and discussed the two most important metrics to understand the health of your book. 

So it’s no surprise that I’m a big fan of technology startups. After all, I wouldn’t work in one if I didn’t truly believe in their value. To me, a tech startup is the right mixture of nimbleness and vision. It is nimble enough to rapidly spot ways to generate huge customer value and visionary enough to build based on what the future looks like, instead of following past playbooks. Tech companies are also able to deliver outsized results. However, the competition is always fierce. You are playing in a market with little wiggle room. Think about the difference between building an Uber and a Hailo. Both started around the same time, both had the same premise, but today one is worth tens of billions of dollars, and the other is bankrupt. Similar stories abound from the tech industry. Now, some risk is uncontrollable. I had an old boss once who ran a multimillion dollar company that was made obsolete when the iPhone came out. Nobody could have predicted that. Yet there are many controllable risks. These are the types of risk that you can spot and protect against that. How? Well, much of this protection comes from really understanding your metrics. The most absurd sentence in the English language is “we lose a bit on each sale but make it up in volume.” And while we all laugh at such a sentiment, the number of startups who don’t track the most important numbers in their businesses is astounding. Conversely, startups that understand their metrics can devote their resources accordingly and grow stupendously.

Now, let’s discuss why you should be reading this post. No, you haven’t stumbled onto an article written for the startup community instead of financial advisors such as yourself. The reality is, there are a great number of similarities between tech startup companies and advisors. For both tech companies and financial advisors, competition is fierce. For startups, there are few ideas that aren’t being executed by a number of teams at once. Whether you’re in insurance, wealth management, or financial planning, you are often selling commoditized goods and differentiating on client service. For startups and financial advisors, then, competition means that growth is predicated on really understanding the mechanics of your business. And, interestingly, when dealing with high-flying advisors, this is exactly what you see. Prominent financial advisors think about growing their businesses the same was I thinking about growing Finaeo, and it’s all around the metrics. 


The Quantitative Advisor

Financial Advisors who are quantitative have a substantial advantage in growthA lot of this blog topic spawned from a conversation I had with a successful insurance benefits advisor. He had had a very good year, growing his business’ profitability up almost 80% from the previous year. Yet, when I dug into it with him, I realized that whereas he started the year with 43 clients, he had ended the year with 35. I asked him what had happened, and he told me he had fired almost a dozen clients that year. Why? Because they just weren’t that profitable. They were making his book bigger, but they cost too much time and money to service appropriately. At the end of the day, he realized that they were a net drag on his business. He was losing money on these clients. He was, at the very core, what I like to call a “quantitative advisor.” That is, he was a financial advisor who really understood the numbers behind his business.

This, to me, was a really interesting “aha” moment. It reminded me of the many startups I had worked with who were neurotic about their unit economics. That is, they tracked and traced every customer dollar and made sure that each customer they added was profitable. It also reminded me of the startups who didn’t. A big example last year was HomeJoy, which obsessed over growth at any cost and lost money on every customer, going bankrupt after burning through tens of millions of raised dollars. And for every one HomeJoy, there were hundreds of earlier stage companies who followed a similar path and fizzled without the investment dollars or fanfare. These were companies who chased revenue growth at an excessive cost to attract said revenue. They, unfortunately, lacked insight into their unit economics. Or perhaps they knew about it, but believed that growth and the ever-vaunted economies of scale would save the day. The end result was always the same – a company either bankrupt or teetering on the edge of bankruptcies and continuing to go full steam ahead on a strategy that lacked a basic business model.

And here I was, chatting with an employee benefits insurance advisor, and he was telling me that he was tracking some of the key metrics that I had advised startups to track for years. He called them by different names, but the key business ideas were the same. This was really interesting. It made me start thinking about the strategic frameworks that tech startups use, and whether they could be adopted by financial advisors. That is, I started wondering if some of the basic mental models that entrepreneurs are also pushed towards could be used by someone selling insurance or investment products instead. I believe the answer to that is yes.

As such, this is part one of a new series I will be publishing over the next few weeks. In this series, I will discuss the key metrics that I believe matter for financial advisors such as yourself. As this is a very large topic, I will break it up into two or three articles. Today, I want to focus on a very important metric – your cost of customer acquisition (CAC). In subsequent articles, I will talk about churn and your customer lifetime value. Finally, we will discuss the most important metric for any business – the LTV:CAC ratio. This is the metric that matters for successful businesses. However, to get there, we need to start small! I will attempt to keep this higher level and less technical, but there will be a little bit of simple math. 


Acquiring a Customer – Your Channels Matter

Understanding Your Channels as a Financial Planner, Insurance Broker, or Wealth Manager Matters!In the early days of the business, customer acquisition follows a very simple formula – beggars can’t be choosers. This is true for startup companies and it’s true for financial service professionals. That is, when you’re trying to break your teeth in, you’re not concerned about how much time or money it takes you – you just want to make sure your business is growing. Yet, this is the sort of mentality that makes people far less successful than they should be. It also keeps advisors from tracking their results in a more systematic way.

Let’s imagine an advisor who is trying to figure out a prospecting channel. We are going to assume that this advisor is still in growth mode – prospecting is necessary to keep growing. What general channels can she use to her advantage? There are a handful I can think of:

  • Cold calling
  • Going to events (lunch & learns, conferences)
  • Door to door sales
  • Social media (e.g., Twitter)
  • Online marketing (e.g., Google AdWords, Facebook ads)
  • Mail campaigns

Now, if you’re currently growing, you have probably tried some of these channels. Most advisors I talked to have had some experience with cold calling. Many have raved about conferences they’ve attended or events they have hosted. Unfortunately, very few have actually taken the time to calculate the value of these activities.

Insurance agents, advisors, and wealth managers should understand channels before spending money on conferencesThe group benefits advisor I discussed this with, my quantitative advisor, told me an anecdote about his first few years on the job. There was a conference that was considered bee’s knees for insurance brokers. Talking to his mentors in the industry, he was advised to go. It would be a great opportunity to network, make connections, find referrals, and get new clients. The price tag was pretty steep – he had to fly, book a hotel for a few nights, and pay for tickets. But he was assured it was worth it. All in all, he estimated that it would cost him roughly $3000.

So, year after year, he went. And year after year, he had a great time, made friends, and networked his butt off. Our quantitative advisor, however, was also very meticulous. He kept track of all of his clients and their sources of referral. Before his sixth year at the conference, he decided to calculate how many clients he had received from anything related to the conference. That number was two. In other words, he had spent roughly $15,000 to generate two clients. His client acquisition cost (CAC) was $7,500 through this channel. He compared this to a few other channels. He had a lady who would cold call for him, and the CAC through her was around $500. He had used Facebook ads to target the niche market he mostly focused on – the CAC there was less, about $220. And here he was spending $7,500 per customer?

Now, it should be noted that a CAC, in and of itself, is not enough of an indicator. Imagine if those two clients that he picked up for $7,500 each were worth $30,000 each, while the $500 cold calls were worth less than $1000 each. In such a situation, spending money at these conferences would be well worth it. We will return to this idea in a future blog on LTV. However, for now, let’s put this aside and assume clients from each of these sources were worth roughly the same. The point worth understanding here is that quantifying your channels allows you to take decisions from intuitive gut feelings to quantitative reasoned ones. And the first step to quantifying your channels is understanding what each one is costing you.


The Value of Quantifying Your Channels

Acquisition costs per channel should be calculated by financial planners, insurance agents, and wealth advisorsThere is huge value in making business decisions by data rather than by gut. For one, you get more predictable answers. If you never track and learn how much time & money it takes to close a client through cold calling, how can you tell if it’s a better use of your resources than a different channel? Maybe cold calling is worth it, or maybe you’d create far more useful leads through online media. Perhaps your online content marketing (i.e., writing blogs) has created huge amounts of thought leadership leading to clients, or maybe you spend 10 hours a week on your online presence and never see any returns. Now, if the answer is obvious, you’ll likely not need to track that much. If you’ve never received a phone call from someone mentioning your blog after a year of writing it, you can probably stop spending time on it. Those are the easy instances. It’s the channels where you see some results that become more complicated. If both cold calling and conferences are producing results, where should you pump more resources to grow?

Moreover, by tracking appropriately, you can also start spotting the levers in any given channel that make a difference. Let me give you an example. Imagine if your website causes 5% of people who land on your page get in touch with you. That is, for every 100 users who reach your page, five will call or email you. That conversion rate is a major lever – if you can change your website in some way to turn that 5% into 8%, this may lead to a huge result. Likewise, if your website isn’t converting enough people, maybe it needs an overhaul or you need to change the messaging. By tracking your channels, you can also begin tinkering with small changes that may generate substantial returns. But if you don’t know what a channel costs, it will be impossible to do this.



Quantifying Your Channels In Four Easy Steps

So I’ve hopefully convinced you that it’s time to start tracking and understanding your channel costs. So how do you do it? The math is actually much easier than you think. Here are steps:

  1. Pick a specific channel you want to understand over some period of time (e.g., 1 month)
  2. For that time period, add up all the dollars you have spent in marketing for that channel
  3. For that time period, add up all the dollars you have spent in labor costs
    • If you are doing the labor, make sure to calculate this dollar value by multiplying the hours you spent on the channel with your wage rate ($dollars / hour) 
    • Include all time spent to turn a prospect into a client, including touch points such as meetings
  4. Add #2 and #3 together to get your total cost per channel and divide this by the number of clients generated through the channel

In other words:

Insurance agents, wealth managers, and financial planners should calculate CAC this way

It’s that simple! Let’s try an example with an online marketing channel. Let’s assume you are using AdWords and that each cost per click is $10. That is, it costs you $10 for every person who sees your ad in Google and clicks on your website. These people now have a two options:

  1. They can leave the site
  2. They can directly email / call you and become prospects

Now, in reality, there is a lot of value in creating better flywheels. For example, getting them to follow you on Twitter, subscribe to your blog, leave their contact information behind, etc. But let’s keep this example simple. For each 100 people who go to your website, five people become prospects by reaching out (a 5% conversion rate). Now, of those five, you spend approximately 25 hours in total in meetings, phone calls, and follow-ups. We will value your time at $50 / hour. Of those five prospects, one will convert to a client.

In diagram form:

How to calculate your cost of acquisition as an advisor

So, as described above –  100 people click on your ad and at $10 / click, you have spent $1000 so far. Five of those become prospects, and you spend 25 hours on them. At $50 / hour, that’s an additional cost of $1250. Finally, of those five, one converts. That means you spent about $2250 ($1000 to get them to the website, $1250 in the time spent) for that one client. Now, imagine if you had converted two clients. You’d still be spending $2250 in total, but now that would be divided by two clients. So your CAC would be $2250 divided by 2, or $1125. If you had converted three clients, that CAC would drop further to $750. And so on, so forth.

So the math is easy. What part is hard? Staying organized around the data. That is, you need to be able to keep track of which channels clients are coming from. You need to keep track of how much time and money you spend on each channel. The more precise you are, the better, but don’t let perfection be the enemy of good. If you know you’ve spent approximately 8-12 hours cold calling last week, it’s better to put 10 hours down and track accordingly than decide not to track at all.



Challenge for financial advisorsThis week’s challenger is to start tracking your channels. Pick an easy one first – something like conferences, cold calling, or online marketing. Then start tracking your numbers. Find out how many dollars a customer costs you on any given channel. Once you know this over a few channels, you’ll have a good idea of where to focus your time to get more clients. As always, please share and subscribe!

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