Up Your Business - April - 2016

Customer Acquisition to Retention Cost Ratio

Up Your Business is an exclusive GEARS Magazine feature in which I share stories, insights, and reflections about real business and life challenges.

It’s likely that you’re familiar with the phrase “customer acquisition cost.” But have you ever actually taken the time to calculate what it costs you to acquire a new customer? If not, you should do it and do it now.

In this article, I’m going to discuss the relative costs associated with acquiring new customers, retaining existing customers, and recovering lost customers.

Some of you might think that customer retention is less of an issue for transmission-only shops because transmission customers are often “one-time” customers. If that’s you, I think you’ll feel differently after reading this article.

A LESSON FROM SATELLITE TV

If you’re a regular reader of this column, you’ll recall my father’s observation, “Smart people learn from their mistakes, but wise people learn from other people’s mistakes.” With that in mind, here’s a story about a personal experience I had with two satellite TV companies.

After hearing from a friend that he recently received a deep discount and upgraded service from the same carrier I was using, I contacted them to see about getting the same deal. They responded that I didn’t qualify for that deal because I hadn’t been using their service long enough, but I could qualify in about three months if they still offered that promotion.

In the meantime, I was approached by a different carrier. They offered me essentially the same deal as my friend if I’d switch to their company. They even threw in a couple extra incentives.

Now, I place a high value on loyalty and tend to develop a relationship with companies I like. I truly liked my provider and didn’t want to change. But the other company’s offer would save me about 35% with no perceived difference in the service, and I didn’t have to wait to see if they’d still be offering the promotion in three months.

I decided to contact my carrier. The conversation went something like this: “I’m contacting you to give you the opportunity to retain me as a customer. I’ve received an offer from your competitor that’ll save me $xx each month for two years. I’m perfectly satisfied with your service and I’d prefer to not make a change. Are you willing to match their offer?”

The representative didn’t even hesitate replying that they could not only match the deal, but they’d even upgrade my DVR to the latest version at no extra charge. The only catch was that I’d need to sign a new, 2-year agreement that carried a cancellation fee of $300 during year one and $150 during year two.

I told the rep that I was fine with that because I had no other reason to switch companies than the monthly cost. He proceeded to wrap up the transaction and arranged an appointment to have the new equipment installed. He said the new, lower monthly service fee would begin immediately.

Fast forward six months… my bill shows a significant price increase. The new price is now higher than my original service. I called to discuss what I thought was just going to be a billing error. I was informed that the lower price was only good for six months and that my increased bill was correct.

Of course I was quick to point out that I wouldn’t have entered into a two-year agreement that only provided me with six months of savings. In essence, their reply was sorry, but nothing could be done.

I told them that unless they honored our agreement and returned my monthly service fee to the agreed amount, I would switch to the other company. They declined, stating that they had the right to increase rates after six months. And to add insult to injury, they brought up that I would face a $300 early cancellation charge!

In the end I did switch. I was able to negotiate $100 off the cancellation fee and the new company gave me a $100 VISA gift card for switching to their service, so the early cancellation only cost me $100.

I’m pleased with the new company and my new deal is actually better than I expected. They even sent me an Xbox One, worth over $350, for Christmas! They also send me weekly email announcements about upcoming shows that fit my interest profile. They include tips for getting the most out of their service and shortcuts for using their DVR. They seem to be very focused on keeping me happy and retaining my business.

Since making the switch, the original company has offered me “the moon” to switch back to them. They’ve offered cash incentives, lower rates, even more super high-tech equipment, and more. If they’d just met my original request, I’d still be their customer.

It’s clear that these companies are willing to invest lots of time and money in acquiring new customers. But only one of them has learned the lesson that it costs so much less to retain existing customers than to recover lost ones.

CALCULATING THE COSTS

New Customer Acquisition Cost (NCAC) is simply the amount of money you invested to get a new customer. To calculate your New Customer Acquisition Cost, choose a period (month, quarter, or year) then add up all the money you invested in advertising, marketing, and your sales staff.

Divide that by the number of new customers you served for the time covered. The result is your average New Customer Acquisition Cost. You’ll probably be surprised at just how much it is.

Lost Customer Recovery Cost (LCRC) is a bit more difficult to calculate and it’s somewhat subjective. It’s similar to acquiring a new customer in that you need to go through the marketing process of re-attracting them and ultimately selling them again (reacquiring them).

But while recovering a lost customer is similar, now you need to remediate the issue that caused you to lose the customer in the first place. This likely means you’ll have to spend money; how much can vary significantly from case to case, based on the severity of the circumstances.
So your average is more of a general measure of how well you prevent, mitigate, and resolve customer upsets.

Because it’s more of an intuitively subjective number, I recommend that you use it primarily for comparative analysis of improvement or lack of improvement in this area of your business.

To calculate your Lost Customer Recovery Cost, I suggest you determine the average of the Unique Segregated Costs (USC) associated with resolving matters with lost customers. For the subject period of time, divide the total of your Unique Segregated Costs by the number of lost customers you’ve recovered to determine your average USC. Now add the average Unique Segregated Costs to your average New Customer Acquisition Costs (NCAC + USC = LCRC).

While your Lost Customer Acquisition Cost is somewhat artificially high, it doesn’t even include the resulting cost of lost business, lost referrals, and lost reputation. This illustrates the importance of keeping customers happy.

Customer Retention Cost (CRC) is even more difficult to calculate. The study of CRC has resulted in several approaches to calculating the number. The difficulties rest in the wide range of variables you need to consider.

A short list of these variables includes:

  • Average purchase amounts
  • Frequency of repeat purchases
  • Impact of potential referrals
  • Loyalty factors affecting expected life of customer relationships
  • Frequency of follow-up contacts
  • Costs for the follow-up methods you use (phone, face-to-face, mail, email, texts, Facebook, Twitter, LinkedIn, etc.)

One school of thought is to think in terms of Lifetime Customer Value. The customers-for-life concept isn’t new, but trying to calculate an actual average cost for customer retention seems to be less important than the generally accepted premise that it costs substantially more to acquire a new customer or recover a lost customer than it does to retain an existing customer.

Experts generally agree that it makes sense to consider the ratio of the acquisition costs to the average amount spent on retention activities.
The average Customer Retention Cost is simply the total invested in retention activities divided by the total number of all customers.

Usually the resulting ratio is anywhere from 8:1 to 20:1. This means it costs from 8 to 20 times more to acquire a new customer than it does to retain existing ones. The greater the company’s New Customer Acquisition Cost and Lost Customer Recovery Cost, the greater the ratio will be.

WHAT CAN WE LEARN?

“Keeping customers happy keeps customers” should be your company’s mantra. If you aren’t investing in customer retention — staying in contact with your customers, making sure your customers are happy with your company, and fixing it if they aren’t — you’re missing the boat.

It shouldn’t take much more time to calculate your numbers than it took to read this article. If you don’t think you have the time, assign it to your bookkeeper.

At last year’s Expo, Alex Goldfayn spoke on revenue growth. He’s written a book called The Revenue Growth Habit. His book is packed with ideas and techniques to grow revenue, but if you implement Alex’s simple techniques, you’ll be well on your way to greater customer retention too.

Be wise and learn from the mistakes made by my Satellite TV experience.