Fable
Two abacuses, one business
A new rice shop opened in the west of the city. Every day after closing, Boss Fang calculated an account: how many new customers came today, how much was spent on flyers, how much was spent hiring people to shout. He wrote in the ledger: today's customer acquisition cost, three strings of cash. Three months after opening, Boss Fang found that flyers on East Street brought more people, while flyers on West Street brought fewer. Counting by foot traffic, East Street cost half a string per person, West Street one and a half strings. He almost decided to cut West Street.
The clerk stopped him and pulled out another ledger. Most customers on East Street bought once and left, half a dou of rice at a time, earning less than twenty wen; customers on West Street came every month, three dou each time, and in three months the profit came close to two strings of cash.
With the two ledgers laid side by side, the conclusions were completely opposite. One told him how much it cost to get a person through the door; the other told him how much that person was worth once they stayed.
Boss Fang reconciled the accounts once a week from then on. Customer acquisition cost looks at the week's spending, while customer value extends at least half a year. If customers from a certain street generate profits several times the acquisition cost within three months, keep investing; if it is just busy but not profitable, stop.
By the end of the year, the rice shop had become the most profitable shop in the city. While others still compared how many people were queuing out front, Boss Fang compared how many people in the line would come back a second time.
Boss Fang also checked credit sales and referrals. Customers from West Street not only repurchased, but also brought neighbors; East Street was lively, but people often came for the opening discount. Looking only at how much was spent on shouting at the door would drive away the customers who truly sustained the shop.
The rice shop later ran a small experiment. East Street continued to hand out discount flyers, while West Street switched to giving regular customers rice bags and account tokens. A month later, East Street was still bustling at the door, but the books were thin; West Street had fewer visitors, but the rice jar turnover was steadier. Boss Fang finally stopped being led around by the day's foot traffic. Later Boss Fang recorded two figures for each street: how much was spent to bring people in, and how long they could stay and generate profit. Only by combining the two could he tell which street was worth continuing to invest in and which street only looked busy.
Someone asked for the secret, and Boss Fang said: the money for opening the door and the money for daily living must be calculated together. If you look only at the money for opening the door, you will cut out hospitality; if you look only at the money for daily living, you will forget that inviting guests in also costs money.