I don’t know a business owner that I have sat down with in the past that has said: “I have just the amount of customers I want.” Thinking about the prospect of that conversation actually makes me laugh out loud a little bit. Most small business owners are in fact constantly trying to figure out the puzzle of adding more customers.
Customer acquisition costs vary wildly by industry. For instance, in the travel industry, the average cost for a company to gain a new customer is only $7. Meanwhile, for a bank to gain a new customer it costs them on average just over $300. To compute the cost to acquire a customer, you would take your entire cost of sales and marketing over a given period, including salaries and other headcount related expenses, and divide it by the number of customers that you acquired in that period.
To compute the lifetime value of a customer, you would look at the gross margin that you would expect to make from that customer over the lifetime of your relationship. Many small businesses run into a problem with their overall business model when it comes to customer acquisition. This can happen when the cost to acquire a customer is greater than the total lifetime value of the customer. This can happen for several reasons, but one simple one is that small business owners spend too much time trying to acquire new customers rather than “growing better customers”.
Let’s go through a quick example to illustrate this point. The owner of a local kids shoe store spends money on Facebook, Google Adwords, a marketing consultant and advertising in a local parents magazine on marketing in order to create new business. They compute their customer acquisition costs over a three month period to be $45 per customer. However, because they have a customer loyalty and POS system that enables them to track the lifetime value of a customer, they see that the average customer only makes $40 in gross margin from purchases. This is an indicator of many things, one being the shoe store does not spend enough on marketing to its’ current customers. While you may think this scenario is highly unlikely, look no further than the meal delivery industry which has this exact problem.
No matter the industry, however, the cost of acquiring a new customer far outpaces the cost of customer retention. By some accounts, the cost of acquiring a new customer is 5 times more expensive than retaining a current customer. Customer retention can have a dramatic increase in profitability as well. In fact, studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have shown that even a 5 percent increase in customer retention can lead to an increase in profits of between 25 and 95 percent.
Taking all of this into consideration makes it even more amazing that according to statistics from Small Business Trends, just six percent of small businesses focus on customer retention. I can tell you that I have witnessed this first hand. I have sat through numerous meetings where business owners talk about increasing their business using different marketing tactics to find new customers. Rarely does the owner discuss strategies to increase revenue from current customers.
Below we discuss a few tactics which businesses can consider to drive the lifetime value of a customer, or as I like to say, how businesses can build better customers.
Track Who Your Customers Are
Many small business owners I know don’t have a system in place to track who their current customers are. How will they build a better customer if they don’t know who they are?
Think of your last shopping experience on Amazon. You went to the website and after logging in, the website suggested multiple products based on your prior experience (we’ll get back to this in a second). In order for Amazon to do this, they must have a system to track who you are, what you looked at, and how much you have spent.
While most small business owners don’t have the resources to spend on a system such as Amazon is using, there are many systems out there that can give them good enough information to get started. Small business owners should take a look at Square point of sale system or loyalty systems such as FiveStars, Belly, or Punchcard. Most of these systems, along with someone that knows how to navigate through the data, are a small business owners first step in being able to track who their customers are.
Build Better Relationships with Your Customers
Once a business knows who their customers are, they can take steps to build a better relationship with them. This can be done through many tactics including using email software and social media. Many of the systems mentioned above have automated systems to reach out to customers. For instance, if a customer hasn’t visited in 90 days, the system will automatically start a drip campaign aimed at bringing them back to your business. This small tactic alone is more than 90% of small business owners are doing.
Building a better customer is not always about offering them deals. It is also about identifying with what they care about. Blogging, emailing, and posting items on social media that your customers can identify with will help build a better relationship. As the accountant, I will let the marketing team take over from here.
Sell Customers What They Don’t Know They Need
What if you knew that 60% of your customers that bought Product A also purchased Product B? If that were the case, couldn’t a small business owner then create a campaign around selling Product B to everyone that purchased Product A?
This is a big part of what Amazon does. Remember that time you bought a new dog toy on Amazon. The next time you got on to the website, they suggested a certain brand of dog food. They did this not because you bought a dog toy, but rather because they know that people who buy the certain dog toy you did also buy a particular brand/type of dog food.
While this may seem like a hard task, setting up your systems in a certain way will allow a small business owner to do this somewhat easily. Imagine how far ahead a small business owner will be that is employing similar tactics.
Creating a Loyalty Program
If you’re looking for a way to get customers to return more often and spend more when they do, then look into offering a reward program that pays them back for their loyalty.
Data shared by Lab42 showed that 73% of millennials (and 48% of Gen Z) said their purchase habits are influenced directly by loyalty programs. Some 60% of consumers could be persuaded to make more purchases with brands that have loyalty rewards programs.
Most of the loyalty systems shared earlier give small business owners the capability and flexibility of designing a system to best appeal to their customers.
Some businesses may struggle to get customers to sign up for their loyalty system. Here is a trick…make it mandatory. We work with a client who combines their waiver and loyalty system into one. Without signing a waiver, the customer is not able to use the facility. Another business we work with gives an automatic 5% off for customers in their loyalty program.
There are plenty of other tactics and strategies to help “build a better customer”. However, no matter what strategy a small business owner decides to employ, there are three constants they must have in order to be successful. They first must have an understanding of the numbers that are impacting their business. Second, they must have someone that understands the systems that need to be in place and how to mine the data in those systems. And third, they need a rock star marketing plan to directly appeal to their customers.
Krieger Analytics is a unique accounting practice that is looking to provide financial clarity for the business owner so they can accomplish their goals. We aren’t the typical accountant as we want to provide a high, more comprehensive level of service to you. We help you understand your past results and plan more for the future. Unlike most accountants, I am also a small business owner so I understand the issues you are dealing with. If you would like to discuss your business and see if we may be the right solution, contact us now.