Why there’s no better ROI than inventory acquisition
Your guide to measuring what really matters
If you ask me, there isn’t a better ROI on the planet than investing in inventory acquisition. I’ve always followed the metrics mantra “If you cannot measure it, you cannot prove it.” That’s what this blog is about – it’s a guide to measuring what really matters when it comes to inventory acquisition – that, and showing you why investing in inventory acquisition is through and through an incredible ROI.
For the sake of this blog we are going to look at three of the most important metrics in acquiring new inventory:
- The value of new inventory
- Customer acquisition costs
- The LTV:CAC ratio
Even if you aren’t the biggest math fan, by the end of the blog, my goal is for you to determine if you can make more profit from your customers than it costs to acquire them and to show you the results from the best in class vacation rental management companies we work with.
Can I make more profit from my customers than it costs to acquire them?
In short, the answer to this question is – YES!
I’ve interviewed hundreds of executives from various vacation rental management companies, I built my own vacation management company from the ground up and I was an executive at one of the largest property management software companies out there. I’ve seen a lot of metrics, and I’ve come to realize it’s vital to use an ROI calculator to help make financial and business decisions.
Using an ROI calculator to predict the future results of your investment strategy
ROI calculators help you realize the profit or loss in your investment. They are excellent at predicting the future results of an investment strategy. While many of us understand what ROI is, to be very clear, it is the ratio between the net gain and net cost of an investment. It compares the net income from an investment to the net expenses required to finance that investment.
The value of new inventory
In a future blog, I’m going to break down the value of adding a rental property to your program. But for the purpose of this blog, I will share my quick hack that is almost always accurate. Based on the averages, the lifetime value of a property equals the annual gross booking revenue. So, for example, if the property is doing $36,000 in gross booking revenue, you will have a lifetime value of $36,000. Stay tuned for more information on how you can calculate this.
Knowing your cost to generate a new customer
Once you understand the value of acquiring a new property to your program, it’s vital to calculate your CAC – cost to generate a new customer.
Imagine your CAC was $1,000 to get one new contract. This outlay would be investing into a proactive marketing strategy.
So if your lifetime value of a property is $36,000, over the lifetime of this property you will net $35,000.
And remember, while it’s a $1,000 investment to acquire the customer, you will have a stream of revenue every month, and it typically takes about just over 3 months to break even on acquiring a new customer. After month four, it’s all profit!
The LTV:CAC Ratio – the holy grail of all metrics
its simplest form, unit economics answers the question: Can I make more profit from my customers than it costs me to acquire them? Remember above, the answer to this question was yes! Here’s why:
The holy grail of all metrics in inventory acquisition is the LTV:CAC Ratio, which is the lifetime of profits of a property vs. the cost to acquire them. This calculation takes into account all of the key factors in inventory acquisition. It takes into account churn, the lifetime of a property, and acquisition cost. If you’re going to track one metric for inventory acquisition – this is it.
So typically what we are looking for is a target of 20x but the best companies out there are doing it at 40x.
Take a look at the results of your competitors
Here is a summary of the target numbers and the results from the best in class companies:
Let’s crunch some numbers for you!
Whether you’re a metrics guru or hate crunching numbers, we’ve created an interactive calculator that you can have fun playing around with. Find out how much value is in inventory growth and see for yourself why there is no better return on investment than new inventory!
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