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Essential Steps to Determining Customer Costs

written by: Ian Johnson•edited by: Elizabeth Wistrom•updated: 10/1/2010

Every company has some customer costs. These costs involve the time it takes to locate and retain customers. The cost of a customer is one of the most important aspects of business growth. Lowering those costs will improve opportunities for growth and increase gross profit.

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    Lower The Costs of Finding Customers!

    Why is it important for companies to understand the costs associated with finding and keeping customers? Well, determining customer costs is one of the most important aspect of business success. No matter how good the business plan is, how well the product is designed or how well it’s made, if the company can’t find customers, or the costs to finding them are too high, then the company will eventually fail.

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    Most New Business Owners Ignore their Customer Costs

    When someone visualizes a new business opportunity, they often concentrate all their efforts on the product or service itself, and rarely on other aspects of how best to deliver that product to customers. It may indeed be a great product or service offering, but its eventual success relies upon the ability to control the costs of finding customers to buy it. If those costs are too high, or are higher than the gross profit generated by the sale, then the company simply doesn’t have a chance at survival. What does it mean to determine, control and mitigate customer costs?

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    Determining Customer Costs Means to Control Marketing Initiatives

    MorgueFile: mconnors Most companies are simply unaware of what marketing is, or why it’s vital to their growth. They assume that marketing is separate from sales and therefore something not quite tangible that can be measured or controlled. In fact, most view marketing as coming up with a new company catalog, blog, web-page etc. Marketing is sales! They are the same. Marketing is everything a company wants to tell its customers about itself. It’s not just about the product’s features & benefits, but also about the company’s engineering & design capabilities, it’s customer service excellence, its vast inventory and quick turn around times and ultimately, the reason why a customer should buy from the company.

    When companies realize that marketing is so important, they then realize how it plays a role in reducing the costs of finding and retaining customers. So, how is this cost determined?

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    1. Amalgamate Total Costs of Each Advertising & Marketing Initiative

    Companies that excel in finding and keeping customers are constantly working to improve their processes. To improve means to lower costs and secure more customers. The first and most important step is to track the total spent by each advertising and marketing initiative. Tracking these costs plays a vital role in determining the most cost efficient method of locating new customers.

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    2. Determine Number of New Customers Accrued By Each Initiative

    Companies must track how and why their customers come to hear about their business. Whether they hear of the business through trade shows, advertising in print or trade magazines, searches on the Internet, or even by word of mouth, it’s essential to understand how they arrived. Sometimes it can be tracked – especially in the case of Internet searches or website & blog visits. However, sometimes it’s as simple as asking.

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    3. Determine Per Customer Cost of Each Marketing Initiative

    Marketing: Visionquest Understanding the total costs of each marketing plan, as well as how the customer came to hear of the business, are the first two steps. To determine which approach is the most cost effective, it involves determining the cost per customer of each marketing approach. To simplify this, here is a table showing how a company would determine its most cost efficient method of finding customers.

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    4. Analyze Results & Set Plans to Reduce Costs

    When companies put plans in motion to reduce these costs, they don’t just sit back and wait for results. Instead, they are proactive and resourceful in analyzing both success & failure. This is by no means the end of the process when it comes to mitigating customer costs. Companies must learn to refine each approach, align their advertising initiatives with discounts and reward programs and always have the mindset of reducing these costs over time.

    When looking at the attached table, it becomes immediately obvious that the least expensive form of controlling customer costs is by securing new accounts by "word of mouth". References are an excellent way to lower the costs of finding and keeping customers. In fact, it's the number one indicator of a company's excellence in sales, marketing & customer service. A number of businesses make it a goal that their references bring in a specific number of customers each year. Understanding how these costs are derived, and how best to control them, is a pivotal aspect of growing a business.

    http://www.morguefile.com/archive/display/3060