You’ve sold a product or a service. You’ve calculated your cost and sold it at a profit. So the sale is profitable, right? Not so fast. Is this the first sale to this customer? Have you calculated your customer acquisition cost? If you sold something for $100 and made $20 on the sale and your customer acquisition cost is $60, you may need to make three sales to that customer just to break even. So what is customer acquisition cost? It’s everything that goes into you getting customers. Here are some obvious examples: your website, media and print advertising, the salaries of your marketing staff, the salaries and commission of the sales team, business cards, brochures and letterhead, gifts that you buy to give to customers, dues and fees to go to events and association meetings where you find your customers, lists that you buy to get new customers, the costs associated with your newsletter. Here are some less obvious costs: You brand yourself in a particular way through having a clean and sophisticated office, special shirts or uniforms for your workers, your name painted on your vehicles, the music and ease of use of your phone system, the portion of your receptionist’s salary that greets customers, and any other things that create your brand awareness. The point of having a brand is to attract customers so these costs should be included as well. And if you’re the decision maker, you’re using some of your time to focus on customer strategies, niches, problems, sales people issues, etc. So allocate some of the cost of your time, too.
This is the whole point of customer loyalty. If you spend all this money to get a customer and he’s a one-and-done single transaction, you’ve lost a lot of money. If, however, that customer becomes a raving fan, he repeatedly buys your product or service and you can start making money from him. If he then refers other people to buy your product or service, you’ve made more money from him and your customer acquisition costs can be decreased.
So how do you achieve greater customer loyalty? The experts and the research say personal points of connection occur at every point where someone from your organization interacts with a customer. Making that customer feel respected, unique and special, showing empathy, defusing stressful situations and turning that energy into something positive are all ways to build customer loyalty. Whether the buyer is buying a candy bar in a drug store or a multi-million dollar contract, personal connection keeps the customer coming back. That is the ultimate customer loyalty test. Does s/he come back?
I encourage you to take the following steps:
- Decide on a time frame, perhaps 7/07 to 6/08,
- Make a list of all your obvious and not-so-obvious customer acquisition costs,
- Divide the total of your costs by the number of new customers generated during that time frame. That will give you your acquisition cost per customer.
- Calculate your average sale and your average profit.
- How many times do you need to earn that profit before you’ve covered the acquisition cost for that customer? (Divide the cost per customer by the profit per sale.)
- Show this to your sales team to make sure they know when that customer starts becoming profitable to the business.
- Show that to your product/service fulfillment team so they know how many times that customer has to keep coming back just to break even on the customer acquisition cost and before the profit starts to pay their salaries.
- Provide customer loyalty development workshops to focus you and all your staff on effective points of connection, handling stress, handling unhappy customers, being positive, and the importance of internal and external customer loyalty.
Implementing these steps and actions should help you create a business structure that is profitable and rewarding for the long term. Please feel free to contact me to discuss these strategies and other solutions you can implement in your business.
Best of luck!
Jeri
4 Responses
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Jeri –
These are great tips, and a useful reminder that every part of the business process is measurable. I also agree with you about the importance of making every customer feel valued and appreciated. I can see why this is especially important during this challenging economy.
Jeri, this is a thought provoking article. Someone once told me that how you operate as an employee is how you will operate as an owner. So many people are focused on “working in” their business and are not “working on” their business. Few people take the time to measure all the costs associated with developing and maintaining their business and clients. I agree with Tom, this analysis is even more important as margin and contracts become thinner.
A very nice article Jeri.
I’m glad you found value in this posting. Thank you for your comments. So much of our ‘accounting’ work is focused on the past and accountants will tell you that your ‘financial statements’ tell the true picture of your business. But that only reflects the past and is good for tax purposes. I think, as do many others, that the metrics that a business owner wants to focus on are predictors of future business, customer loyalty scores, employee surveys of alignment to company vales and direction, employee retention numbers, monthly trends in # of new customers, revenues/margins per customer and per salesperson, sales pipeline, marketplace trends, etc. Keep an eye on my blog posts here to learn more or contact me directly. Always I welcome your comments.