(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…