Do you know the real costs of getting, losing, and keeping clients?
Missed Opportunities, Lower Revenues
How often have you lost a customer because an email went unanswered for too long and the person turned into a client for your competition? Or an employee got impatient with a difficult individual who slams down the phone, vowing never to do business with your company? Is your response “Oh well, there are plenty more fish in the sea. No big deal.” If so, you are throwing away business and your hard earned money.
Customer Service Dynamics Impact the Bottom Line
If you or your employees have a casual attitude about the ones that get away, then perhaps a clearer understanding of the costs of getting, losing and keeping clients will change your thinking. Here are some startling facts¹ about the impact of customer service interactions:
- It costs about 5 times as much to attract a new customer as it does to keep an existing on
- The lowest-ranking employee in a business can lose more customers than can be gained by the highest-ranking employee.
- In the average business, for every customer who bothers to complain, there are 26 other who remain silent.
- The average wronged customer will tell 8 to 16 people (about 10 percent will tell more than 20 people).
- 91 percent of unhappy customers will never purchase goods or services from you again.
- If you make an effort to remedy customer’s complaints, 82 to 95 percent of them will stay with you.
Every client transaction has a cost associated with it that boils down to three basic scenarios. You can
- reap an initial return on your investment by attracting customers and converting them into clients
- lose money and more when a prospect walks or runs away
- maximize your investment by retaining customers and turning them into raving fan
This is the first of three articles exploring the costs associated with getting, losing, and retaining customers. This article focuses on the cost of acquiring clients while the second measures the costs associated with losing customers. The third article offers suggestions and solutions for keeping more of the clients you attract.
If you would like to do a bit of homework or refresh your knowledge about the basics of customer relationships, take a few minutes to read “A Framework for Customer Relationship Management”² by Russell S. Winer published in the California Management Review.
How Much Does It Really Cost to Get a Customer?
Have you ever calculated how much it costs your business to attract each customer? This figure is an important business tool for two major reasons. First, it is one measure of your cost of doing business. If it costs you $100.00 to attract one customer for an average sale of $75.00, then your company is losing $25.00 per customer, – an invaluable piece of information. Second, by analyzing and tracking the cost of acquiring customers, you can see which costs are delivering a solid return on investment as well as those that are weak or ineffective.
Costs can be “direct” or “indirect”. Direct costs are considered to be those expenses that require an out-of-pocket monetary expenditure and are often found as a line item in a budget such as “advertising” or “postage”. Direct costs are amounts spent on email campaigns, direct mail pieces, advertisements, phone calls, attending conferences, marketing materials and more. Indirect costs may be part of overhead such as salaries and taxes as well as those activities that require an outlay of time, energy, or lost opportunities rather than money.
Most business owners can look at their budgets and tell you how much they think any and all of these activities cost; however, calculating direct costs is only one half of the total cost equation.
Factor in “indirect” costs including time and energy spent on each project as well as trainings, research and other business expenses. While you can dig deep in analyzing indirect costs, focus on the largest numbers, typically salaries and overhead, and consistently factor them into the costs associated with attracting new clients. Need some help with the numbers? Here is a handy tool³ for calculating the acquisition costs for attracting new customers.
If you have two staff members who each are paid $50.00 per hour and they spend five hours each for a total of 10 hours on an email newsletter, add $500.00 to the cost of that campaign. If you are the owner or manager of the business, remember to factor in your time as well. Many small business owners work long hours including time spent on business development. Track your actual hours worked instead of using a typical 40 hour work week and attach a dollar value to your sweat equity. As difficult as it may be to face the reality of the amount you are making per hour, the time you spend building your business does have a monetary value.
Calculate these same costs for every activity that is devoted to attracting customers and the true total cost is undoubtedly much higher than expected. It certainly exceeds the line item in the budget. Unless you calculate the direct and indirect costs in the same way, you cannot accurately compare the costs of attracting new customers.
Calculating and Comparing Costs to Drive Business Decisions
Comparing the costs associated with each type of campaign or activity the knowledge you need to understand which activities generate a profit and which activities need to be modified or discontinued. Of course you need to know how your customers found out about you so having a referral tracking system is an essential component to your financial analysis.
Here is a simple example to demonstrate the concept – one advertisement that appears in two magazines. The direct costs are easy to ascertain. A designer was hired to create the advertisement at a cost of $1,000.00. One magazine charged $4,000.00 for the advertisement while the second magazine charged $8,000.00. These three direct cost items equal $13,000.00. Factor in the time you spent with the designer developing the concept and text as well as reviewing the design for indirect costs of an additional $1,000.00. The total advertising costs is $14,000.00. One campaign costs
$5,000.00 ($4,000.00 + 1/2 the cost of the designer’s time + ½ the cost of your time) while the other campaign costs $9,000.00.
Let’s assume that your business is a dental clinic and the average amount one of your customers generates for your business is $500.00. To cover the costs of each advertisement, the less expensive advertisement must produce 10 new customers while the more expensive advertisement must deliver 18 new customers. By tracking which customer contacted your business from each advertisement, you will be able to measure the actual return on investment of both ads.
Did either or both advertisements deliver measurable results? How do they compare to other methods used to attract new clients?
Without calculating all the actual costs of getting customers, you may not be able to analyze and evaluate the tactics your business is employing to attract those clients. Without knowing what works and what does not, you hurt your business by impeding profitability. And what business can afford that?
In the next two articles, we will explore the costs of losing customers and why retaining clients is vital to the success of your business. Look for our next email and in the meantime, visit our web site to learn more about delivering VIP customer service.
Want to start getting and keeping more customers today? Improve the customer service skills of you and your staff by signing up for our online courses, Telephone Skills for Medical Tourism Professionals, Email Etiquette-Netiquette, and Working with Upset Customers.
Your investment will pay for itself when your business keeps one more customer!
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