- Written by Tim Knowles. Google+
- Published: 06 January 2014
There are some hidden costs when you consider how you acquire new customers, but where are the holes and how do you plug them?
I don’t care how beautiful you are, the cost of acquiring and retaining a customer can make or break your business.
And what you do with the leads / prospects that DON’T buy from you can be as critical as what you do with those who do. Does your sales team appreciate the blood sweat and dollars that you put in to generating each and every lead?...
Some businesses have their customer acquisition metrics down to the nearest cent while others don’t even get why it’s of interest. So I’d like to peel this back to it’s simplicity by aligning it to the sales funnel because if you don’t have the funnel defined in the first place you won’t be able to cost it. And if you don’t have customer acquisition costed you’ll have a hard time getting your team to plug the leaks and make the most of the leads they get. I’m amazed how many businesses don’t do the math on such things and just bimble along spending “something” on marketing, and getting “some” sales and then trying to evaluate whether a campaign was a good idea or a bad one
All we’re talking about here is adding up the dollar value, the hard earned wonga, that it actually costs you to generate an enquiry, a lead or a sale. Its not rocket science.In the above diagram, if you spend $20,000 on marketing, every one of those 1000 leads cost you twenty bucks. But if only 100 of them were really any good, they cost you two hundred bucks each right?
Then if your sales process only manages to sell to ten of them, those customers just cost you two grand each and that’s before you factor in the cost of paying your salesman to sell to them.
Breaking down your marketing costs this way allows you to make some fundamental decisions in your business like:
- Is this marketing worth doing?
- How effective is one sale person compared to another?
- Is it worth building a mailing list out of the ones that got away?
- Am I charging enough to actually make a profit?
- Is there some bit of the operation that I could outsource?
To be really thorough about costing your customer acquisition, you’d include any cost associated with convincing a consumer to buy your product or service, including research, marketing, advertising, your whole sales process, right down to 1800 number costs, and the paper you write his name on. Even without getting that sophisticated, you could do a lot worse than assigning a marketing dollar value to each stage of your sales and marketing funnel so that you can zero in on the leaky bits.
I’m a firm believer in looking at what a business does with the ones that got away, the leaks.
Like any business metric, customer acquisition cost should be considered along with other data, especially the value of the customer to the company and the resulting return on investment (ROI) etc. Such calculations help a company decide how much of its resources can be profitably spent on a particular customer or type of customer.
At the height of the dot.com bubble, companies frequently ignored such calculations in their pursuit of growth. For example, a company I know of at one point was spending about $90 to acquire each customer, although the average lifetime value of a customer to them was only about $65. Usually it’s not so smart to spend more acquiring a customer than the amount that customer will net the company in return but there can be some strategic exceptions.
But for the rest of us, we need to acquire customers for a LOT less than the profit they’re going to generate. So start by defining the funnel, cost the various stages, and then do all you can to improve the conversion rate at each stage by plugging the leaks. That’s where we come in.
Talk to us about our “Funnel Analysis” service which in most cases won’t cost you a cent. Simply call 1800 808 232
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