The Cost of Losing a Customer
- Acumen Learning
- May 16, 2023
- 5 min read
Updated: Jun 1, 2023
Using Business Acumen to compare customer acquisition vs. customer retention.
Brent Barclay, a Senior Financial Consultant at Acumen Learning, breaks down the cost of acquiring a customer and the cost of keeping a customer. Losing a customer can be extremely expensive, hurt your team morale, and take time and energy to replace. Here is a transcript of this video:
Acquisition Vs. Retention Costs
For many people - as I look at customers it seems pretty intuitive that it's probably easier to sell to a customer you've already had vs. trying to sell to new customers. One of the things they'll talk about is the cost of acquisition — and it's quite high. Some will say it's somewhere between 5-7 times the cost to get a new customer as it would to sell into an existing customer. So from a business acumen perspective, recognizing that all your investment dollars going toward marketing of new customers and trying to do acquisition, well what if I took some of those dollars and really had a robust retention program. Really understanding my customers. Aligning what they're trying to accomplish to the solutions that I have available – which means they want to continue to buy from us for multiple years and multiple experiences. In the end that's a great way to get a greater return on your investment dollars.
Now you end up having to have both. You can't just do one without the other. That being said often we spend so much time on the customer acquisition we don't emphasize, we don't put as much budget towards customer retention and really that's the place where you can really expand and succeed as a business.
Balancing Acquisition and Retention for Businesses
And many of these consulting, training, development companies, a big emphasis is your existing customers. That's where the lion's share of your dollars come in. In fact, it can be harder for small businesses to get new customers and so you end up focusing a lot on those existing customers. And sometimes in small businesses it flops the other way. Where you spend so much time on your existing customers, you're not working enough on the new new. And so if you happen to lose one of your key customers because of turnover or whatever changes may happen, you end up kind of putting yourself in a tough situation.
So, for small businesses you get a large customer you're just trying to keep up with the pace. But you cannot forget about "I got to also invest in trying to get new customers." So there's really a balance that you've got to consider. But absolutely for small businesses, the lifeblood of small businesses is their existing customers and that retention of those relationships.
So, one of the big costs of not keeping your customers, obviously you now don't have the revenue in future years. There's a term that they talk about call the customer lifetime value. It's all the dollars they spend with you. If I have a customer spending $100,000 over 10 years, my customer lifetime value is a million dollars. So it's not just what you would get this next year, maybe a hundred thousand, but if I lose that customer in 10 years that would have been a million dollars of value I've lost. And so recognizing that there's a value of these long-term relationships.
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The Importance of Customer Lifetime Value
Now you see this a lot in subscription businesses, right? If I'm a SAAS company and my model is all about subscription, I have to focus on those existing customers. It cost me a lot to get them up and running but every year after that, that's a low cost and it's a high profitability for the future. So, you really want to be good and SAAS companies spend a lot of time with that. But sometimes service companies, consulting companies, etc. we get so busy with working with certain groups that we forget the value of that lifetime customer.
As you look at customers buying from you, new customers about 5 - 25% will actually buy from you. 25% would be very high. Of all the customers you talk about 25% of them buy, and it's usually on that lower end. Versus, if I'm selling into existing customers about 60 - 70% of them will actually buy something from you. So, it's much easier I you have that good relationship, you understand what they're doing and what they're working towards, it's much easier to sell into those organizations.
The Value of Business Acumen and Long Term Relationships
I'll give you an example. Just recently I was doing a year in review. I was talking with an existing customer and all I did was share an opportunity. What I thought might be the next step based upon their training and development goals and objectives. There was no question. "Yeah we absolutely want to do those." Earnings call debriefers is what I was selling. It was a great opportunity for us to immediately there's trust there, there was confidence there, which meant "yeah I want to add those to next year." Versus somebody brand new, I would need to sell multiple pieces for them to see the value of that. So, selling into existing customers you'll have a much greater close rate than you will with new customers.
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Business Acumen Aids in Understanding Your Customers Business
So, one of the things I think is real valuable in our Building Business Acumen for Sales Professionals, is this idea of understanding their strategy, understanding what their key metrics, what are they trying to accomplish. One of the greatest ways to improve retention is to truly understand their business — be able to speak to their key metrics and measures, their strategies. Now all of a sudden instead of me just selling features advantages of benefits of my product, I'm selling solutions to their goals and objectives. You switch your role. Instead of a transactional sales individual you become a partner. You're part of my team. You understand what I'm doing and you're helping me make a business case as to why, in our case, a partnership with Acumen Learning can really drive to your profitability, your cash flow, or your goals and objectives.
Use Business Acumen to Be a Partner
So I think that's the real differentiator, is the more you understand about your customer's business and if you can help them align your products or services to their goals and objectives, you're no longer a sales individual. You're their partner.
Treating Your Employees like Internal Customers:
Just as customer retention is important, so is employee retention. According to the University of Minnesota Human Resource Management Group, an employee who is paid $8 per hour can cost a company upwards of $4,000 to replace. This may not sound too bad. But a 100 person organization that provides an average salary of $50,000, could have turnover and replacement costs of $660,000 to 2.6 million per year. And this is using the turnover rate of 26% which is what it was in 2017. The percentage is almost 33% for 2021 according to the Bureau of Labor Statistics. Treat your employees just as well as you'd treat your customers!
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