Can marketing be used to lower a company’s costs of acquiring new customers? Can marketing justify the universal claim that it costs companies anywhere from three to four times more to find new customers, than to retain existing ones? Well, the simple answer to both of these questions is a resounding yes, it can. Most companies hear that it costs them more to find new customers, than to keep existing ones, and chalk up this statement as just another erroneous business cost that can’t easily be quantified, or one that is merely a soft cost not to be concerned about. Unfortunately, for them, and fortunately for you the reader, they’re dead wrong.
There are a number of different approaches to determining a company’s costs of customer acquisition. There are models that focus solely on the costs of finding qualified leads, models that concentrate on a company’s costs of converting these leads into paying customers and finally, models predicated on defining costs based on the time it takes to build that customer’s account over time. However, the best models incorporate all three of these factors, and so will ours. However, ours will be simple and straightforward.
In order to determine your true costs of customer acquisition, you must first define your costs to locate qualified customer leads. Next, you must define the costs to convert these qualified leads into paying customers and finally, you must define your costs to turn these paying customers into repeat customers. Granted, it sounds like an involved process, and it can be. However, after reading through these three steps, I’m sure you no longer question whether it costs more to find new customers, than it does to retain existing ones. There is a cost to finding potential customers, turning them into buying ones and retaining them for the long-term.
Step #1: Define Costs of Lead Generation
The table below is taken from the post: Does Your Business Know How Much it Costs to Get a New Customer? It outlines the total expenditures for a series of marketing initiatives and the number of customer leads that arose from those initiatives. The individual cost of leads is provided on the far right.
The company’s "total new customer leads" (bottom of table) for this period was 2500. This is how companies analyze their marketing ROI (return on investment). Increase the number of qualified leads your company generates for each dollar spent on a given marketing initiative, and your company has increased its marketing ROI!
The calculation involved in determining your cost of leads is straightforward. Take the total expenditures and divide it by the number of leads resulting from that specific marketing initiative. For instance, the company spent $1,800.00 on the first marketing initiative of “mobile marketing plans” and generated 250 leads from those plans, making the costs of each lead $7.20. Granted, it will be easier to measure the effectiveness of some marketing initiatives compared to others. For instance, tracking leads from your company blog or website is much easier than tracking the leads coming from print or magazine advertisements. This means that you must become adept at measuring inbound marketing vs outbound marketing for small businesses
2. Define Costs of Customer Acquisition
It’s one thing to locate qualified leads, but it’s something else entirely to be able to close sales with these leads. Your marketing department is tasked with producing qualified leads, and increasing your marketing ROI by reducing your company’s costs of finding qualified, potential customers. However, your sales team is tasked with closing these leads and turning them into customers that place orders. This is where you’ll be able to add another filter as to whether your leads are truly qualified or not. If they aren’t a true lead, then you must reassess why they were qualified as such. Answering this question will allow you to tweak your marketing plans and further increase your marketing ROI.
If they are a qualified lead, then you must define your costs to convert these leads, or put another way, you must define your sales cycle times. You could do this by product line, or by customer type. Now, you could leave the analysis to just determining your sales cycle time, or you could take the analysis a step further and divide the number of leads closed during a given period by the salaries paid to sales, customer service and marketing employees.
For instance, a company might determine that of the 2,500 qualified leads from step 1, they managed to close 50%, or 1250 of them over one quarter of their fiscal year. The company could take the salary of their sales, customer service and marketing team and divide it by the 1250 in order to determine the company’s costs to close these leads. The problem with this approach is that it assumes that these business functions are solely concerned with closing business. Unfortunately, rarely is that the case. It also doesn’t account for all the operational support roles and their appropriate costs. This would then force you to get involved in determining the percentages of time spent prospecting, selling and servicing customers – and this is not something you want to do! Stick to determining your sales cycle times on qualified leads. It’s much easier to manage and far simpler.
3. Define Costs of Customer Retention
The last step is the simplest one of all. Every company should be able to quantify how long it takes to build up business at a given customer account. However, it first involves defining the levels of business within your company. In the post B2B customer management: determine a customer’s true value, we outlined how a company should determine the value of a given customer account on several criteria. One of these criteria included the amount spent by a customer. Your company should be able to determine a reasonable time needed to move that customer from $1,000.00 in sales to $5,000.00, from $5,000.00 to $10,000.00, and so on.
To summarize these three steps, start by defining your company's costs of lead generation. Next, simplify how your company determines the costs of customer acquisition by focusing on your initial sales cycle times on new customers. Finally, determine your company’s unique criteria on a customer’s value by using amount spent over a given period of time. This process won’t necessarily provide you with a dollar value figure on how why it costs four or five times more to keep existing customers than to find new ones, but it will help you define the importance of your current client list.
- Define costs of lead generation
- Define costs of customer acquisition
- Define costs of customer retention
At the end of this exercise, you should be able to define your costs of locating qualified leads, the time it takes to convert these leads into paying customers and the time it takes to build these customers into pillars within your business. You want to define your costs to generate qualified leads, assess the validity of those leads, define your sales cycle times and then quantify the time it takes to grow these accounts over time. As mentioned, you could always expand your analysis and include the salaries paid to sales, customer service, and marketing employees. However, this is time consuming, difficult and involves trying to add percentages to non-manual processes. Not easy by any means.
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