The Dangers Of Losing Existing Clients

It happens to the best of us. Occasionally, we lose a client. As a matter of fact, American businesses experience between 20 and 50% customer turnover annually. Maintaining a solid customer base means the difference between success and failure.

Understanding Customer Acquisition Costs

Understanding customer acquisition costs (CAC) helps refocus attention on customer retention and customer support. Has someone in your organization calculated your cost of acquiring a new customer? If you cannot answer this, create a task force to properly identify acquisition costs for new customers.

Acquisition costs reveal the efforts and resources involved in building a quality long lasting business. Calculating acquisition costs vary among industries. The method for calculating these costs is fairly simple if you get your ducks in a row.

Figuring New Customer Acquisition Costs

First, analyze the process your organization uses to acquire a new customer. Only by understanding the process involved in acquiring new customers can you best evaluate the costs associated with each step in that process. This process may include:

• Lead generation
• Marketing
• Advertising
• Pre-Sale Support
• Sales

When calculating acquisition costs, do not limit your calculations to customer acquisition expenses. To create an accurate lead generation cost, you must factor in the fixed and variable costs of those employees responsible for acquiring new customers.

Examples of fixed and variable costs are:

• Employee payroll and benefits
• Insurance
• Space Rent/Lease
• Communication costs (i.e., long distance)

When you add in the cost of the employee qualifying the lead and converting it into a real opportunity, plus secondary costs such as long distance and lost opportunities, you might find that the single phase of lead generation equates to $300 per lead created rather than $.30. As a matter of fact, Uspad, one of the organizations for whom we consult, buys their leads at $.30 each for records, but after all the expenses their cost of customer acquisition is $609.57.

Most employees have more duties than just acquiring new customers, so take the average percentage of time they spend working on new customers and multiply this percent by the total costs.

Acquisition costs may be complex to calculate, but the effort you expend in this cost/benefit analysis returns real value to your organization.

Upsad used a very simplified method of calculating their CAC Items Monthly:

Divide the monthly costs by the number of new customers to find your average CAC. In Uspad's case, the CAC is 8534 / 14 = $609.57

We do not factor in the commission paid to salespeople because that figure directly corresponds to the total profit, not customer acquisition cost. We did include the fixed costs of sales base and the administrative personnel’s time spent directly on activities relating to CAC.

Did you know that losing a client costs twice the acquisition cost?

Losing an existing customer costs twice as much as acquiring a new customer. The cost doubles because you are losing the original CAC for the existing customer who must now be replaced by a new customer to maintain the stability of your client base.

Let’s say the organization Slaidov, Inc. estimates the total cost of client acquisition to be $1,500 per new customer. Therefore, Slaidov, Inc. invests $1,500 for each new account. When an account is lost because of poor customer support, the impact on the organization is $3,000. Impact is calculated by the loss of investment from a current client turning over and the $1,500 investment needed to acquire a new account to replace the lost account.

In some industries, acquisition costs can be significantly higher. In most cases, acquisition costs are relative to the price of goods or services. For instance, the acquisition costs to a company that performs single transactions of $100 to a client may only be $25, but the acquisition costs to a company that sells $100,000 to an account might be $25,000.

So now that you understand how to calculate acquisition costs for your business, you can analyze business impact. You need to evaluate your annual customer turnover rate. Turnover is the number of accounts lost at the end of one calendar year. It is important to analyze turnover rather than year-end growth. Why? If you grow your business by 25%, that would mean you had positive growth. However, despite that positive growth curve, if you lost 10% of your existing customer base, your true growth rate would be 15%.

Let’s just assume that Slaidov, Inc. has a customer base of 5000 with a low attrition of 10% totaling 500 accounts per year. Luckily, Slaidov replaced the lost customers with new customers and had a true growth rate of 12.2% last year.

That means Slaidov loses $1,500,000 in keeping their customer base at 5000. This sobering perspective should seriously alter the mood of most selling professionals and executives regarding customer retention.