When people are looking to get into the junk removal business or purchase a junk removal franchise, there are hundreds of questions they might ask. Where do I take the stuff I pick up? How do I get customers? How do I price? What type of vehicle should I use? What should my website look like? All are important questions. However, very few people ask the most important question of all: how much will it cost me to get a customer and what do I need to charge to make sure I’m profitable?
Customer Acquisition Cost (CAC) is the most important number in your business.
Obviously, businesses require customers. What most people don’t think about when they are determining their expenses is what it costs to get a customer.
The formula for determining your CAC is as follows:
CAC = Total Cost of Advertising / Number of New Customers
For example, if you spent $100,000 on advertising and it brought you 1000 customers, your CAC would be $100.
Now that you know your CAC, you need to know your allowable acquisition cost (AAC) with your current income and expenses. The AAC is essentially the gross profit remaining after expenses but before advertising costs on your first job. We will cover customers’ Lifetime Value (LTV) later in this article as well (it is important), but unless you have a huge reserve of cash, you need to make sure you aren’t losing money on your first job.
Typical Junk Removal Franchise Expenses as a % of Job Cost
- Payroll: 37%
- Disposal Fees: 9%
- Credit Card Fees: 2%
- Insurance: 5%
- Vehicle Wear/Tear: 4%
- Tools/Misc: 2%
- Fuel: 6%
Total: 65% of Job Income=35% Gross Profit Margins before Advertising
AAC = Gross Profit Margin x Average Job Cost
For example, let’s say that your average income per job is $300. Multiply your gross profit margin of .35 by your average cost of $300 to give you an AAC of $105. That means you can pay up to $105 for that customer without losing money!
Your AAC is the maximum amount you can spend to acquire a customer without losing money for that junk removal job.
In our first example above, it cost you $100 to land each new customer. With a CAC of $105, your resulting profit per job is $5. If you completed 1,000 junk removal jobs at a profit of $5 each, you’d be looking at $5,000 total profit.
1,000 Jobs X $5 Profit Per Job=$5,000 Profit
Hard to get excited about that, isn’t it? However, now we must look at the lifetime value of that particular junk removal customer.
LTV = Average Job Cost x Gross Margin x Customer Lifespan
These numbers are not exact. However, we have seen that many junk removal customers will use you an average of once every two years. Some will never use you again. Some will use you every month. However, we use the average one booking every two years for each customer over a ten year period. That means the average customer will use your service five times in ten years.
In this example, the your resulting LTV of each customer would be:
$300 X .35 X 5 = $525
Multiply this lifetime value by the 1000 customers you reached:
$525 X 1,000 customers = $525,000
This mean that over a ten year span, the same $100,000 you spent acquiring your customers wound up profiting you $525,000! Then imagine doing that same advertising campaign year after year. Now you see how to scale your junk removal franchise.
Accepting smaller returns right now is the key to scaling your business for massive returns in the future.
There is one key figure that can absolutely blow up the returns you get from your junk removal business: increasing the average income from your jobs. A $50 increase in the cost of your average job would result in an additional $612,500 in profit over ten years! Those are serious gains, so teach your team how to sell and get those prices up!
If you track this one figure every week, the chances of you scaling your business go up astronomically. Many average companies could be great if they simply watched this figure.
The next article we will release will focus on interpreting this data so you can determine which forms of advertising to use for your junk hauling business.
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