The Cost of a Customer – How Much Will You Pay?

March 25, 2014 — 1 Comment

icecreamHow Much Would You Spend to Get a Customer?

Customer acquisition.  It’s the hard part of the job.  Do you spend time making calls? Are marketing events such as a lunch & learn working? What about networking, emailing, webinars, or partnering with someone? There are lots of ways to get names – and even leads, but it costs money to find new clients.  How much money will you spend to get a new client?

Consider You Growth Options

Growing a company or a region can be confusing.  Whether you own the business and are trying to build and expand, or you’re a sales person reaching out to new prospects in a region you cover, there are options.  Some are good, some – not so good.

In fact, using the wrong strategy, you might find yourself building and growing sales, without actually growing your business.  Perhaps you’re creating more jobs – but is that what you’re after?  When I talk with reseller business owners or sales managers and they start giving me revenue numbers, I know we’re not really talking about the business. Revenue generation at the reseller level is just an ego booster.  It doesn’t matter.  I would rather be running a 1 million dollar business with 70% gross margin than a 100 million dollar business that is headed for bankruptcy or the commodity grave yard in five years.

You can also grow profits by cutting out cost – but be careful! That’s what Breyers did with my favorite ice cream.  The container got smaller, the ice cream is somehow whipped up more, and it’s a totally different experience.  What used to be labeled as “All Natural” is now simply called, “Quality”.  The ingredients have clearly changed, and it’s no longer really Breyers in that midget container of theirs.  I’ve moved on.  Sbarro did the same thing by switching to cheaper ingredients.  Seems like I heard they were filing for bankruptcy reorganization. Sbarro bet on the fact that people would buy their pizza out of convenience – simply because it’s the only pizza choice at a mall or airport.  But when the pizza quality goes downhill, people opt for something else.  And being a world-traveler, I can tell you the food in airports has only gotten better in the past several years.  You can’t cut cost and assume your customers are trapped and will therefore buy from you.  Being the pizza lover that I am, even I stopped buying pizza from Sbarro a long time ago!  (And I am famous for saying – “Bad pizza is better than no pizza”.)  You can’t cut cost and the expense of quality, and build a long term business strategy with the same target market.

A third strategy is to oversell the existing customer base.  When client acquisition isn’t going well, sales managers start pushing to sell more into the existing accounts. This is fine at first, but at some point your loyal customers realize there are only a few of them, and they get tired of buying stuff that’s being pushed on them.  Suddenly they feel like the neighbor of an over-zealous network marketing “entrepreneur.”  Customer experience get’s traded for meeting quota.  In fact, CIOs have told me, “My rep said me he needed my signature to make his quota or hit his accelerator”, as though that was somehow a concern of the CIO.

Marketing Mindsets – Cost Center or Profit Center?

Marketing is part of the business growth strategy.  Or at least it’s suppose to be.  There are meeting planners and people doing some graphics design, but this is not marketing.  It supports marketing.  Marketing means “Getting the message out to people who have a need.”  It’s client attraction.  Companies that have no marketing (even if it’s done by the sales person,) can’t really grow.  This market is too crowded to design your growth plan around referrals.  Marketing means creating messaging, targeting the right people, testing that messaging, measuring conversion rates, and finding better and better ways to reach more qualified people.

For most companies, with our up and down economy, marketing dollars are being heavily scrutinized.  I’m all for that, but in many cases the people making the marketing decisions are only thinking about profits – not effective marketing and ROI.  It reminds me of a discussion I had not too long ago with a former Ford Motor Company engineer.  Back in 1988, I purchased a brand new Sable.  It was the absolute worst car I have ever had.  You might have noticed that there aren’t many on the road.  Every wonder why?  As I went though a litany of problems, he started sharing with me what happened after the engineers came up with the design.  The finance people got a hold of it and started ripping out parts to increase margins.  The engineers tried to fight these design changes, but lost. I’ve owned several Nissans and a Toyota since then.

A growing company can’t grow without investing in marketing.  If you don’t have marketing people and you are in sales, a significant amount of your time should be spent on marketing. If you spend all of your time calling down a list, your conversion rates will be poor in most cases.  I’ve seen desperate sales reps head out on foot and knock on doors, just to avoid vmail.  This is another strategy that is destined to fail.  I’m sure there’s someone out there with a war story that says otherwise, but as a global strategy, forget it.

The Highest Bidder Wins

The highest bidder wins. That’s the person or company that can afford to spend the most on getting a new client.  That’s right – the one who can afford to SPEND the most.  This has to be an investment, not an expense. It might cost several hundred dollars to get one customer, but if that turns into hundreds of thousands of dollars in profit over some period of time, it’s worth doing. This is no different than scattering seed and harvesting.  You need a constant seeding program going on, with a constant harvesting program right behind it.

But before you begin, there are a couple of things you need to know. What is the average customer worth to your company, and over what period of time?  You also need to know what a qualified prospect looks like and where the tipping point is in the relationship.

I was talking with a small integrator just the other day.  Somehow we started talking about assessments. The owner of the company immediately jumped in, stating that over 90% of their assessments (complementary), lead to business.  As we continued, the problem became clear.  Getting that opportunity to conduct an assessment was the hurdle.  So the marketeers job becomes one of getting to the right person to work with on that assessment.  If they can just get this guy to that point, he’s in.  Now, how much can he afford to spend on getting to that point?  If his average deal lands him $50K in remediation and a $4500/month recurring revenue contract, he should be willing to spend a fairly high dollar amount on a qualified prospect.  The marketing department should now go to work, figuring out how to parse a cold list with mailings or other marketing media, to get to a more qualified list of interested prospects. And all at the right level to make this happen.

The Company that fails to do this will be tempted to discount, spam people, or do whatever it takes to get names.  But simply acquiring cheap customers is a strategy destined to fail.  It’s more important to get less prospects who are highly qualified, with long term potential.  People you’ll find yourself really partnering with to create a win/win situations.  By increasing the amount of money you can afford to work with on this process, your chances of attracting the right kind of customer go way up.

Retaining and Building

Retaining and building your customer base is a dual path that must continue.  If you focus only on getting new clients, your existing clients will feel abandoned.  If you cut the cost of your product like Breyers and Sbarro did, you’ll lose your loyal customer base.  If you focus only on your existing customers, they will see that you are not growing, and feel like they are the only ones out there supporting your business. Companies are either growing our shrinking. You can sit in one place for too long.  If your customers sense that you are not growing, they’ll move on. If your customers see all your focus on the new customers, they’ll move on.  Balance and investment is needed.

My final point comes back to price and cost.  If you don’t charge enough, you won’t be able to pay for new customer acquisition.  At that point you will be back to cold calling, and this strategy ultimately fails.  If you charge too little to take care of your existing customers, you end of up with the new Breyers ice cream.  You start competing on price, winning, and then taking care of disgruntled customers who don’t see the value you sold them. Quality ice cream?  How did quality chemicals replace “All Natural”?

© 2014, David Stelzl

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