Sunday, November 28, 2004

How much does it cost to acquire a customer

Matt Michele who runs the Service Roundtable - a marketing firm for HVAC clients writes a very good newsletter titled Comanche Marketing. I find it helps me consider multiple aspects of marketing a service business. His latest edition walks through a brief calculation of the cost of acquiring a customer.


Customer retention comes first. The reason is it costs a fortune to get a new customer. If you'’re brave, take this test.

1. Determine Your Customer Acquisition Expenses

Get your general ledger and classify every expense you can as a customer acquisition expense. Your yellow pages expense is primarily a customer acquisition expense. Any mass media advertising is customer acquisition. Direct mail directed towards new customers is customer acquisition. Your service or civic club membership may represent a way for you to give back, but it'’s primarily a customer acquisition expense.

2. Determine the Number of New Customers

Add up the number of new customers acquired in the past year, excluding those you gained through existing customer referrals.

3. Calculate the Cost of Customer Acquisition

Take a deep breath. Make sure you’'re sitting down. In fact, you might want to have someone standing by with smelling salts. Are you ready? Divide the customer acquisition expenses by the number of new customers.

As soon as you stop hyperventilating, the first thought that’'s going to cross your mind is that this can'’t be right. It can'’t cost that much to acquire a new customer. How can you stay in business? The answer is you can'’t. It costs too much to acquire a new customer. It’s not unusual to find a service company’'s cost of customer acquisition exceeds $200. This is more than the gross profit from the average service ticket.

In other words, if you only do business with each new customer once, you'’ll go broke. You’'ve GOT to get repeat business. The cost of customer retention is typically 15% to 20% of the cost of customer acquisition.

You make money with your repeat customers. You'’ve got to get new customers to replace the customers you naturally lose because they move away or lose for some other reason. You’'ve got to get new customers to grow. You’'ve got to acquire new customers for the future. But you’'ve got to retain customers to make a profit. The better your retention rate, the better your profitability. That'’s why customer retention comes first.

Put a customer retention program in place before you ramp up your customer acquisition efforts. Customers are too valuable to lose.


Post a Comment

<< Home