Numbers That Count - Part Three
Not all customers are equal.
That makes sense.
Not all customers should be treated as valuable.
Some of your customers are a drain on your business, and you might need to get rid of them.
Many social entrepreneurs don’t like this approach, but it’s the truth. We can’t afford to be rude to people, but we also don’t have to ask them to come back.
Tim Ferriss outlined this approach in The Four Hour Work Week, where he described how he fired his nuisance customers, in order to focus on the most valuable ones. If a customer is giving you a headache, and isn’t bringing you much value, you’re allowed to get rid of them – politely but firmly.
This should be a relief! We get to funnel our energy towards the meaningful sales, not the timewasters.
The question is, how do we know which is which?
Here’s how – a new collection of financial metrics, that you simply can’t afford to ignore.
Customer Lifetime Value = How much money a customer spends, grand total. This is calculated by adding up of all their purchases they will make at your business.
“This customer will spend $18,000 on a car, plus $500 on servicing per year for the next eight years. That’s a CLV of $22,000, plus the chance that they will buy their next car from us too”
“Our tourist customers spend $40-50 but only once, whereas our local customers spend $15 per week, 30 times per year. We should be focusing on attracting more locals!”
“We make no margin on selling Nespresso machines, but we sell a lot of Pods over the next 3 years, so each customer brings in over $1,300 of sales”
Cost of Acquisition = How much we spend to entice a new customer. We might spend a lot of money on a promotional campaign, but measure its effectiveness by how many new customers it brought in.
“We spent $5,000 on marketing, and it brought us 100 new customers. That’s $50 per customer, so it will only be worthwhile if those new customers become regulars”
“Our approach is to offer 50% off your first visit. We lose $15 per new customer, but it’s well worth it for the amount they will spend over the next year”
“We spend 10c per click through Facebook ads, and one in eight clicks leads to a sale. That’s just 80c per customer!”
Cost of Retention = How much we spend in order to keep customers loyal. This might be through meetings, calls, vouchers or discounts.
“We have lunch with our major customers every three months. It costs a fair bit, but it gives us the best chance of finding new ways to work with them in the future”
“Our long term customers receive a 20% discount on future purchases. That can be up to $50 per order, but it ensures a long, loyal relationship that generates a lot of revenue over time”
“When a customer complains and threatens to close their account, our Customer Retention team are authorised to offer a gift of $200 for them to stay with us. This is much cheaper than attracting a new customer”
Net Promoter Score = How much our customers like us. This is measures on a scale of 1-10, and indicates how likely they are to share their good/bad experience stories with others.
A score of 9 or 10 makes a customer a Net Promoter, who will rave to their friends and become a bit painful.
A 7 or 8 are Net Passive, when customers don’t think to talk about you.
A 6 or below is a Net Detractor, who will tell everyone willing to listen about how your enterprise is rubbish.
“I went to LA, it was terrible, don’t bother. Hollywood is actually really sad and filthy, go to San Francisco instead”
“My electricity provider is fine I guess? Why do you ask?”
“You have got to go to MONA in Hobart, it’s incredible. I normally hate modern art, but this was different, it’s so well done”
When you look at these four as a collection, they can lead to some interesting conclusions:
1. Some customers aren’t worth your time. If it costs more to acquire than they spend over their life with you, then you just lost money. Worse still, the more of these customers you acquire, the faster you run out of money.
2. It might be worth focusing more on retention than acquisition – getting a second sale might be comparatively easier than enticing a first purchase from someone new.
3. If you can turn a Net Promoter Score of 7 into a 10, that customer will probably bring you some new clients. It might mean spending some extra money to go above and beyond, but it will pay off.
4. If you retain a lot of clients, but they don’t rate you too highly, you should be aware that they could suddenly leave.
Remember, your next 1,000 customers already exist. They are walking around,tryingto solve their own problems, completely unaware of your business.
Your role is to create a system that attracts, delights and retains valuable customers. Now you have the language and mindset for measuring how you’re doing.
This is a four-part series on useful financial metrics.
You can jump straight to:
Part One Introduction, Margins and Breakevens
Part Two Market Sizing and Forecasting Sales
Part Four Churn Rate and Customer Behaviour