Do your customers give you money, or take your money?
It seems obvious. Keep a customer around longer, make more money. Lose a customer, lose the revenue you could have generated from them.
In reality, however, it isn’t that straightforward. The cost to you of losing a customer depends on how long you have retained them in the first place. Do you manage to break even? After all, it costs something to snag a customer, long before you can charge them. Have you reached that first month of actual, tangible, take-home profit? It might be further down the road than you thought.
So, how do you calculate the value of keeping a customer? How much are your customers worth to you, and how does this change over time?
You start by paying an investment to gain a new customer. Payback takes a while, and a small change in retention can mean a huge increase in margins.
Understanding the costs of a customer
Keeping track of your expenses, and understanding how your company does business, will help you discover the value of your customer and how retention effects that value. And it isn’t just expenses directly related to the customer, either! We break these costs down into four areas: the cost for the lead, the presentation, on-boarding, and then finally the bulk of it being the work (and all that entails).
That might seem a little odd to you; calculating the cost and worth of a customer begins before you even land the customer! But this is actually a very vital thing to remember. You pay for the customer long before they begin paying you.
Cost of a Lead
For the first cost, you need to figure out what finding leads really costs you. You may not actually be buying them, but they will take time to gather. Even if you consider building leads and connections and networks as part of your life, it still takes up time. You also have to understand your own lead strategy. Are you high volume? The lead may be less expensive, but you are less likely to get a hit as you scatter your efforts.
Are you low volume, high touch? The lead may take much more time and personal investment. For our purposes, we’ll make an example of low volume, high touch, starting with five leads, each lead costing $100, either in actual money, or work and time you and your team put into landing the lead. So far, with five leads, you’ve spent $500.
Now, it’s time to try and land as many of those leads as customers as you are able. This requires presentations, possibly traveling, lunches…just about anything you can think of to land the customer (in an entirely professional and appropriate manner, of course). This, too, costs money, and you still haven’t made any yet! Let’s say the total cost of each presentation is $400 in work. Then, out of five customers, you land only one. We’re at $2500 deficit for one customer already.
This could, of course, be diminished if you can reduce the amount of work you have to put into a presentation. Having an automated report process such as SpyFu’s Recon Files to look into the SEO of each potential customer will save invaluable amounts of time you would otherwise have to spend researching into every single domain.
But we’re finally ready for billing! Hooray! Finally, we’re making money…sort of. Before you bill, you need to set the client up, and that costs money – again, money you won’t need to pay down the line, but is absolutely crucial in the beginning stages. You have to set up billing, create accounts, get access to systems and basically do a lot of work you wouldn’t normally do, and that you can’t really add into the charge price. So let’s say onboarding costs about $1000. Now we’re at a $3.5k deficit.
Again, we can reduce this if we have an automated SEO report process such as Recon Files. These reports give you something to work with immediately, no matter if you need to focus your campaign to a certain section, or you’re looking at overall SEO.
And then the Real Work begins! You’re charging them $1000 each month for your services. So, you have to supply a service. You’re charging three times what you have to pay your resources (some of them may prefer to be called ‘employees’), so you’re making money on the sale. But there’s other costs involved in keeping a business afloat. Electric and water bills, for example. After all that, you may only be making $500 each month for every $1000 you charge.
With $3500 costs upfront that you need to make back, it will take you seven months to break even. You have to retain a customer for eight months before you even see actual profit for the company, in the form of $500. If you can reach ten months, you take home $1500.
Profit and Margin
The benefit of retaining a customer on from this point is obvious; the longer they stay, the more profit you make. You also avoid the onboarding costs completely, which are, as we demonstrated, a major drain on your finances.
And this is important; at ten months, you’re only making 12-13% profit on your investment. This is a high risk model; you’re not earning as much as you should be. As a consulting company, you’ll need to shoot for at least 20% to keep yourself afloat, and 50% to be more than comfortable. The longer you retain your customers, the higher that percentage will get. And who doesn’t like more money?