Originally Published - June 4, 2014
Every company needs customers to stay in business. No customers means no sales; no sales means no revenue; and no revenue means no business. But customers don’t just come out of the woodwork the second you set up shop.
No, you have to spend money to attract prospects and convince them to become customers. You have to “buy” customers.
There’s only one problem.
You Can’t Afford Your Customers
Are you paying too much for customers? Here’s a clue: if what you’re paying to attract and keep customers outweighs what they’re paying to be customers, then you’re losing money.
Cost of acquiring and retaining customers > Lifetime value of customers = Loss
If it seems simple, that’s because it is. But the challenge isn’t in the understanding; the challenge is in the application.
- Pay per click rates for your most important search engine keywords have increased. Should you pay the higher costs?
- The competition is setting a new standard by spending more on wooing prospects. Does it make sense to increase your marketing budget to fight fire with fire? If so, how much more can you afford to spend?
- You’ve been considering running a promotional offer to attract more first-time customers. How much money can you put towards the campaign and still make a profit?
- Your customer support team is unable to keep up with the large amount of service requests, so you’d like to hire additional representatives. How many more can you hire and at what salary?
- Customer attrition is at an all-time high. Can you afford to offer loyalty discounts to increase repeat business? If so, what kind of money are you able to put towards the incentives?
- The sales team is shopping for new CRM software with more advanced features. How much can you afford to spend?
Many businesses answer these questions blindly. By the time they realized they’ve bitten off more than they can chew, it’s too late and the damage has been done. And the damage from a single, ill-informed decision may be just enough to cripple a business permanently.
What You Don’t Know Will Hurt You
The good news is that this customer acquisition and lifetime value calculator tool gives you the information you need to make confident decisions in the future. Follow the link above to explore the online version or even better, download the calculator to have a copy for yourself:
Want to decrease customer acquisition and retention costs? You could…
- Broaden marketing reach
- Decrease marketing expenses
- Improve the conversion rate
- Increase workforce productivity
- Reduce CRM expenses
- Renegotiate outsourced marketing/customer service contracts
Want to increase customer lifetime value? You could do all of the above, plus…
- Increase the average spend amount per purchase
- Grow the average number of purchases per customer
- Improve the average gross margin per purchase
- Raise the customer retention rate
It’s empowering to have so many options available for addressing the same problems.
Armed with this tool, it’s key to regularly monitor your customer costs (acquisition plus retention) and lifetime value so you can track progress. Always go back to the original equation to see how the metrics compare against each other. At what year does the customer lifetime value exceed the acquisition and retention costs? If it takes five years to be profitable, is that acceptable?
That all depends on your cash flow. Will you have enough cash to float the company for five years while you wait to make your money back? Five years is a long time; your business may not be able to last that long without a positive net cash flow. Many businesses can’t survive unless they become profitable in their second year.
Obviously, the sooner you can make customers profitable the better, so tweak your variable inputs and find out what metrics you need to improve to reach your profitability goals. Knowledge is power!
Have you successfully managed your customer acquisition costs and improved customer lifetime value? Share your insights in the comments section below!