Customers don’t come free. They come at a cost. Whether this cost is through social media, big marketing campaigns or flyers at your local super market, it’s still a cost.
The question becomes, is the cost worth it, or are you paying too much to gain (and keep) a customer? Even more important, do you know how much each new customer is costing you?
Each customer has a lifetime value. This value differs depending on the market or industry you are in.
For example, the lifetime value of a client in the insurance industry is very high. They pay monthly premiums, often for the rest of their lives.
“Launching a risk insurance business is very capital intensive,” says Suzanne Stevens, executive director: marketing at Brightrock. “It takes a large upfront investment to build the brand and reach consumers.”
However, even though there are large upfront costs, the lifetime value of each customer is worth it.
It might take longer for the business to break even (which is worked into the start-up strategy and plan), but the rewards are worth the capital outlay – provided the company can keep those customers of course, which is another part of customer costs.
Great products and services are not free either. They take focused and ongoing research and development, an engaged and well-trained team, and a support system that ensures customers are well taken care of.
Have you taken the time to work out the lifetime value of your customers? To work it out, multiply how much your average customer spends with you on each purchase, how often they purchase from you, and for how long they stay with you.
You can now place a tangible value on each customer, which will help you determine how much you can spend on acquiring that customer, or their allowable acquisition cost.
Your first sale might often be what is called a ‘loss leader’. This means the cost of the sale hasn’t covered what it cost to attain that customer in the first place.
Take the price of a soft drink for example. If millions of consumers purchased just one product, it probably wouldn’t cover the R&D, market research, production costs, packaging, distribution costs and marketing costs that went into the product.
If each customer were to buy a soft drink every day however, their value becomes much higher than a once-off purchaser – and the brand can afford to spend more to secure their loyalty.
Acquiring new customers
Josh Kaufman, author of The Personal MBA, offers the following equation to calculate your market’s allowable acquisition cost:
Start with your average customer’s lifetime value. Subtract your value stream costs (how much it costs to create and deliver your product and service over the entre lifetime of each customer), then subtract your overhead divided by your total customer base, which represents your fixed costs (what you’ll need to pay to stay in business over that period of time).
Multiply the result by 1 minus your desired profit margin (if you want a 60% profit margin, this would be 1.00 – 0.60 – 0.40). The final number is your allowable acquisition cost.
Once you know what the actual lifetime value of each customer is, and the allowable acquisition cost of securing each customer, you will be able to determine if you are spending too much (or too little) on securing and keeping your customers.