Segmented Customer Acquisition Costs Save the Day

(Part 2 of 3)

Part 1 – Is It Really More Expensive to Get New Customers?

Well, I hope you have read the previous entry in the series, if you have not – follow the link above and read it.  Yes, it is necessary to set the proper background for this one.

Let’s dig a little bit deeper into customer acquisition costs.  In my previous entry I talked about a model where each customer carried its own acquisition cost.  You kept detailed records for each customer and how they become your customer.  You use these numbers to make customer-related decisions – satisfaction, loyalty, segments, etc.

Of course, I can already hear the first complaint – what about if we cannot do that.  I would not expect you to go beyond your normal course of business to find out, but I’d expect your systems to be setup in a way that will allow you to capture that information.  If you do carry out a promotion or campaign, you know whom it went out to, and you tend to have unique identifiers (name and address, name and email, etc.).  Same thing with  leads captured, you know where they all came from.  You also know the costs for each of those events.  Presto!  you have the information you need.

First, create a unique identifier for your prospects, make sure you collect the necessary data, and retain for each prospect what the costs have been for you to reach out to them.  Then calculate a cost per customer for each customer you already have in your database (if you don’t want to go through the trouble, average them – not recommended but doable).

Second, change your new account creation process so it accomplishes two things: one, captures the latest marketing campaign or event that convinced the new customer to sign up; two, look into past campaigns to determine whether another marketing effort was aimed at this customer in the past – to see if you have a prospect cost for them. This way when you create a new customer, you already have their personal customer acquisition cost.

OK, now there is one more wrinkle.  Some organizations, not all of them, will require an additional “plus” to be added to each account.  If you have a very large organization, and you spend some money in branding or marketing, spreading your name and making sure you remain in people’s mind, then you need to account for that as well as part of acquisition cost.  This is another shifting number, but not really hard to pin down.  Take your marketing or branding budget from last year, divide it by the total number of new customers you had last year – you have your “plus” number.   Add that number to each customer’s acquisition cost number – for last year only.  Make sure you update it every year for prospects and new customers that you reach out to for that year – even if they were there the year before.  Now you have a complete cost for acquisition for each customer.

Yeah, I know.  Not everyone will have access to all this data.  True.  But you may be able to get some.  You may also be able to capture the data you don’t have today and start storing it for future use.  Further, you may be creating an excellent customer acquisition cost for use next year, or the following and you want to add these calculations.  Whichever way, you can see how useful it will be to have this. Now you can make better decisions on retention, customer maintenance, and <gulp> firing them.  Yep, now it  becomes a real simple business equation.

If you dare to dream, think about benchmarking this and comparing yourself to your industry, across industries, across geographies – anywhere.  Once you create and embrace a model that others use as well, comparisons are easy.

What do you think? Some food for thought? Care to try any of these in your organization?

PS – stay tuned for a discussion on how to calculate a better customer maintenance cost…

Is it Really More Expensive to Get New Customers?

I don’t have the answer to this question mostly because it changes from industry to industry and organization to organization.  However, the question is valid.  As long as I have been in business (including time in college) I’ve heard a statement that goes something like “it costs [insert favorite number here] more times to get a new customer as it does to retain one”.  I have repeated it, as well as probably every one else in the world, as an unchangeable mantra of business. There have been studies that have confirmed this for different organizations or industries.

Yet, in all the work I have done in the last few years with plenty of organizations, no one has taken the time to make sure this did apply to their business model.  I can probably count in two hands the number of organizations that have used accurate customer acquisition costs and customer maintenance cost when making decisions on CRM, CEM, and Loyalty programs.  I prefer not to tell you how many of those calculations were updated periodically as business changed.

Even though we prefer to say it is cheaper to retain customers, it may not be.  A few things to consider.

Customer Acquisition Costs.  No matter how much you try, you won’t have a single acquisition cost model for your organization.  Each time you generate new business, you will have incurred different expenses. Where did the leads come from and how much did they cost? How did we reach out to prospects? What were the costs of the campaign? How much did we really spend internally – including training, systems alterations and customization – attempting to get new customers?  Each time you run a campaign the assumptions will change, and the calculations will change.  What if the prospects were already part of another campaign — are your going to add the costs for both campaigns??  It gets messy and complicated really fast, and without those calculations you don’t have a real cost of acquisition per customer.

Customer Maintenance Costs.   I have never met anyone who did a good job of calculating customer maintenance costs.  There are so many variables for each customer – even for each segment – that most organizations take a more “democratic” approach: the total cost of customer service operations divided  by the total number of customers.  Calculations should be done at the individual level, and consider each interaction, request, inquiry and final disposition for each interaction in relation to each customer.  While it is true that some customers will be virtually maintenance free, there are many others that are not.  Each time a new channel or service program is added, each time a customer contacts the organization for service or support the calculation should change. You cannot assign an average cost for all customers or you will miss the diamonds in the rough.

Finally, once you have your customer acquisition and maintenance cost for each customer you must use them to make your on service plans.  How?  We will talk about that in more detail in future blog entries… stay tuned!

Let me ask you first… what do you think of individual customer calculations? Are they worth doing?

The Uselessness of Granularity in Feedback Management

Warning, we are embarking on another of my pet peeves: granularity.  What?  You don’t know what I am talking about about? Let me explain myself.  Granularity is how detailed of a scale you use when ranking feedback.  For example, you could use a simple Boolean scale, like Yes or No.  You could also use numeric scales, say between one and five.  Finally, you could use word scales, like Horrible, Bad, Neutral, Good, Excellent.  Either way, the concept is that you give the respondent a scale of choices to base their response to a specific feedback question.

What could possibly be wrong with that?  Well, it is not the concept, but the implementation that gets me.  Same as with customer satisfaction and loyalty (you could click on these links for my previous rants on loyalty and satisfaction). The concept of giving people choices is good, as it creates way for them to express opinions on any topic.  It allows organizations to prioritize their efforts and focus on those that need more attention — a Horrible rating needs more attention than a Bad one.  Same thing for Good and Excellent.  See, the logic is good

The most common used scale until recently was one through five.  That is not that bad, really, except for the odd number of options (more on this later).  However, some “genius” somewhere decided that five options is not enough.  We need to give the customers a scale from one to ten for them to grade us.  They call that granularity and the flawed assumption is that more options will give the organization a deeper understanding of the true feelings of their customers.  There are two problems with this logic:

First, there are too many options. Customers are already hard to reach for qualified feedback, do you really want to add time to the survey – and so many choices for each question?  Consider a typical, not a good, customer satisfaction survey.  It has 12-15 questions.  Let’s assume that only nine of those questions have granular scales for answer.  In the time it takes a customer to decide whether questions number four and six deserve either a six or a seven the most likely outcome is that they will abandon the survey, or choose an answer without cause.

The worse part of this, when you get the responses you cluster the answers because there is no real difference between six, seven, and potentially eight – they all become one!  So the time you asked your customer to take to choose the best granular-scale response was wasted, and the decrease in response rates is actually justified.  Customers realized long before you did the uselessness of granularity – and they stopped responding to granular-scale questions.  Not really worth the unlikely benefit of getting better definition of their needs and demands.

I know what you are asking yourself: what scale should I use then?  A four-option, word scale: Poor, Bad, Good, Excellent.  Why four?  Remember when I said you did not want to have an odd number of options?  If you give customers five options, they will pick number three more often than not.  This is called, informally, fence-sitting and fulfills the purpose for customers to give you feedback but not take a position.  Was my service good? It was Neutral…what does Neutral mean?

Anyway, I am now getting off my soap box.  Let me part with some statistics.  Among the people I recommended using this scale, and adopted it, customer satisfaction was up an average of 8 points, and response rate scored consistently higher – not with just one survey, but over time with returning customers.

What do you think?  Are you going to try this?  Let me know your thoughts…

What To Do With The Feedback You Collect From Your Customers

It has been crazy and busy lately with EFM; I have been traveling the world spreading the word — and it has been so interesting.  It has amplified my views of EFM and given me lots of new ideas on what to do with this blog.  It has also given me an idea on spreading the word even faster: Twitter.  Do you twitter?  If not, you should check it out.  I am starting to spread the word on EFM via twitter — starting Monday October 13th, a new EFM insight a day via Twitter… tweet me!

I have been doing lots of thinking and working with EFM at the strategic level, and it led to me think about the need to implement EFM properly.  I am not simply talking about putting together a strategy for EFM, which I do endorse highly, but also where does it fit within the overall organizational approach to feedback.  In other words, why would an organization take on collecting, analyzing, and reporting on feedback?  After all, if you can do a survey and get some data – isn’t that enough?

Well, not quite.  The most interesting part of the question is actually what to do with the data and (more importantly) the insights collected and analyzed.  Yes, you can distribute a survey, collect some results, and report on them – even analyze them – and consider yourself done… but there is so much more.  Listen to this crazy, crazy approach to using EFM.

First, make a commitment to using feedback as valuable data.  That means you won’t just measure customer satisfaction, or yes / no to some inane questions that may, just may, earn you a bonus – but not create insights into your customers or products.  Make a commitment to using feedback wisely as a strategy, collecting and analyzing key business metrics over time.  Once you do this, you have the basis for the second step… building a dashboard.

Dashboards? how can they be related to feedback?  Well, you could build a dashboard simply by using efficiency metrics (number of calls, average handle time, average wait time, etc.), but wouldn’t you want to build one that means something for your business?  If you strategically determine the metrics that matter about your business, your services, your products — and the effectiveness-based metrics you must follow for the health of your business, you can then prepare a great real-time dashboard that shows you the health of your business — and tie those metrics to the feedback you collect!

Alas, once you create a real-time view of your important metrics, and use feedback to populate that – what about the long-term view?  Glad you asked (OK, you didn’t, I did).  Once you have a real-time, short-term view of your business it is time to make the jump to long-term, strategic measurement.  The tool we use for that is a scorecard.  Ah, yes… the scorecard.  You can use feedback to measure your key metrics over time, spot historical trends, and see where you have to invest time and resources to improve your products, services and resources.  And the best part?  You get to do this as your improve your use of feedback – from taking surveys, to adopting EFM, to implementing Dashboards and Scorecards.