Have You Calculated The Cost of a Customer?

May 1, 2007
p class="style4"It's fundamental, but surprising how few business owners know what it costs to acquire and what it costs to retain a customer. To know

It's fundamental, but surprising how few business owners know what it costs to acquire and what it costs to retain a customer. To know your
customer acquisition costs is to know fear. It will drive you to develop a strong customer retention program. These customers are too valuable to risk losing once you acquire them.

Acquisition Costs
A calculation of your customer acquisition costs begins with an identification of your new customer marketing efforts. Sometimes it's
difficult to separate the acquisition and retention portions of your marketing effort. However, it can be done.

Start by identifying everything you spend to get new customers. The Yellow Pages are primarily directed at new customers. Any mass media advertising targets new customers. Direct mail efforts, unless it's to your existing customers, is a customer acquisition cost. Your truck identification expenses have some soothing effect on existing customers, but are primarily aimed at building up your image among prospective customers.

If you belong to a lead club, civic club, or the chamber of commerce, these are customer acquisition costs. You may join Rotary because you believe in "service above self," but your presence in Rotary or similar clubs is really a form of grassroots marketing. It should be categorized as a customer acquisition cost. Don't forget to add the cost of any promotions, specials, or sales. Your customer acquisition costs are more
than just media costs. Go through your P&L line by line and add up everything you spent over the past year.

Next, look at how many new customers you gained during the past year. Exclude any customers you can identify that found you from a referral or by word of mouth. They are new customers, but they are new customers that resulted from your customer retention efforts.

Once you have your customer acquisition costs and the number of new customers, simply divide the total acquisition costs by the number of
customers gained. Don't be surprised if you discover that it costs two to three hundred dollars, or more. Often, the cost you incur in attracting
new customers cannot be justified if you never do business with them again. In other words, the gross profit you earn on a typical transaction
is less than the customer acquisition costs. New customers are an investment. And unless you have a customer retention program in place,
you're squandering your investment.

Retention Costs
You follow the same steps to calculate the cost of your retention marketing efforts. Look at everything you spend to mail to existing customers. Look at all of your follow up costs. Your retention costs include everything you spend directly targeting your existing customer

Look back over the customers you did business with during the past year. A retained customer is any customer that did business with you during the prior 12 months that had previously done business with you. It's possible to count a customer as a new and retained customer if they did business with you for the first time during the past year and did business with you again, later in the year.

Divide the cost of your retention efforts by the number of customers kept. It will probably be a fraction of your customer acquisition costs.

Your retention costs are actually a better investment than they appear. Remember the referred customers? These are customers who call you because of a referral by one of your existing customers. You might want to add these to your retained customer count to better identify the cost per customer of your retention efforts.

Once you know what it costs to acquire and what it costs to retain a customer, it will quickly become clear to you that the smart money is in the development of a customer retention program first.

Matt Michel is president of the Service Roundtable (www.ServiceRoundtable.com), an organization dedicated to helping contractors prosper. Matt is also the publisher of Comanche Marketing, a free marketing e-zine. Subscriptions are available at www.ComancheMarketing.com. You can contact him directly at [email protected]. Or send your comments to Contracting Business at [email protected].