In my last post, I discussed the importance of understanding the purchasing decision process typically used by your customer segment. In Lean Thinking terms, it is important not to waste time or resources pursuing the wrong decision makers with misaligned tactics.
Can You Improve the Customer Acquisition Process?
Can the cost be reduced? Are there ways to influence the process so it can be more effective?
I firmly believe there are ways to improve all processes so my answer is “yes”. When we see something as a process, we can reflect on the steps in the process and look for improvements or ways to eliminate steps.
To understand “improvement”, we need a way to measure the effectiveness of the process. In this post, I would like to discuss two important metrics for customer acquisition:
What is the Cost to Acquire a Customer? What is the Value of a Customer?
The cost to acquire a customer should include all marketing and selling expenses. This would include obvious expenditures and salaries plus benefits. Don’t forget costs of showrooms, collateral materials, mock-ups, and quoting expenses.
The value of a customer should be seen as the Present Value of future revenues. To calculate present value, I advise you use your cost of equity. If you don’t know your cost of capital, use 30% as your discount rate. Factor in your known or expected retention rate to account for attrition.
When Do the Customer Acquisition, Customer Value Metrics Matter?
First, here is the situation where they don’t matter; an early stage startup.
If your company is a startup, you will probably find this hard to calculate. You don’t yet know what your customers spend, what your retention rate is, or the cost of maintaining a customer (customer service, for example).
As a startup, if you haven’t done this calculation, don’t spend a lot of time attempting to be precise.
When you first start your business, it is more important to get customers at almost any cost than to worry about the cost of getting them. While you must acquire customers at almost any cost to make a startup succeed, you are really working towards a sustainable business model which creates profits which can repay your investors.
As your business matures past the startup stage, the ratio between the value of a customer and the cost of customer acquisition should be between 5/1 and 10/1. Said another way, sales and marketing expenses for most companies ranges between 10-20% of revenues (yes, there are exceptions).
In a more mature business, these metrics can be easily tracked by aggregating expenses properly in your chart of accounts. For some readers, this may be obvious, but I mention it as I’ve seen many financial statements which never bother to calculate the subtotal.
Business leaders should direct their accountants to create the appropriate categories in the chart of accounts. Without direction, most accountants will simply put salaries into a single account, not focusing on the need for operational measurements and controls.