Acquiring new customers vs Repeat Business is a delicate balance. Focusing on just new customers, with complete disregard for existing, is exhausting and expensive. Not to mention your company becomes trapped, constantly focused on this quarters' profits, rather than on the health and well-being of the company over the long-term. Focusing more on existing customers can be easier and profitable but leaves virtually no room for growth. You need both to thrive.
To keep your finger on the pulse, you need to see how much it costs to acquire a new customer, how well you're doing on keeping customers, what is that customer worth over their lifetime, and how much does it cost to maintain that customer.
Customer Acquisition Cost is simply the sum of all costs associated with convincing a customer to purchase a product or service from you. While this is mainly the cost of sales and marketing material, fees for trade shows, and advertising dollars spent, you need to consider the time and energy expended by your organization to acquire each new customer. In the past, attributing costs to customer acquisition was hard to do. Nowadays, the web makes it a lot easier to determine which campaigns worked and how much it cost you to acquire your customers.
Customer Retention Rate is a measure of how good you are at keeping your customers and is calculated as follows:
((CE-CN)/CS) X 100
CE = number of customers at end of period
CN = number of customers acquired during same period
CS = number of customers at start of period
while important for any business, this is more readily calculated for businesses with subscription or membership-based offerings. Easiest way to calculate is by year. So if your company had 110 customers at the start of the year, 115 customers at the end of this year, and acquired 25 new customers this year, then Retention rate would be ((115-25)/110) X 100 = 81.8%
Cost of Customer Maintenance is the expenses incurred to maintain that existing customer over the life of the relationship. If a repeat customer is only worth $150 over the course of five years, but it costs you $300 over the same five years to maintain that relationship, either you need to find a way to increase the value of the customer or decrease the cost of maintenance. Marketing has two jobs. Attract new customers and maintain a relationship with existing ones. This is done through frequent email newsletters, seasonal catalogs, or periodic coupons and sales to maintain brand awareness. Your sales reps can get involved as well by periodically checking-in with existing customers to see if there is anything they need. So there is a cost to this, perhaps a bit harder to measure. But it's a proven fact that margins on sales to existing customers is routinely higher because cost of sales are lower. There is already an established rapport that increases comfort levels for both parties making each additional sale that much easier. That's why it's so important to tailor your company culture to make customers for life.
Customer Lifetime Value (CLV) is what your customers are worth to you, on average over the course of your relationship with them.
The simple formula for this is (Avg Monthly Revenue per Customer * Gross Margin per Customer)/ (1 - Retention Rate).
There are more complicated ways to calculate CLV to factor in things like Discount Rate, the cost of capital used to discount future revenue from a customer, and Contribution Margin. For our purposes I wanted to keep things simple. In this example, if we sell magazine subscriptions, and our average monthly revenue per customer is $10 and our gross margin per customer is $5, and our retention rate is 81.8% (based on the previous example). From this we can expect our customers to be worth $264 dollars over the life of the relationship [(10*5)/(1-.811)].
With these calculations you should be able to be able to tell with reasonable certainty how much it costs to earn a new customer, how much it costs to keep them, how well you're doing at keeping them, and how much they are worth to you. The degree of accuracy will be largely dictated by the quality of information stored about client interactions, cost of marketing campaigns, sales processes, value and frequency of customer orders, among other things. Having a quality CRM that captures all or most of that information, will lift this burden and put the information readily at your finger tips.
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