Acquisition Cost vs the Lifetime Value of a Customer
As a business owner, the most important thing to be able to do, is to sell your product or service. Acquisition Cost
If you can’t sell anything, then you’re not in business; you have got to be able to monetise what you do.
Have you ever taken a step back and calculated just how much it costs you as a business to acquire a customer?
I don’t just mean a lead, I’m talking about the entire sales process needed until a person actually starts spending money with you.
I urge you to go and do that exercise; I promise, it will be quite a revelation.
Acquiring customers, encouraging them to make that first purchase with you – it costs a lot of money.
When you do know how much it costs your business to acquire a customer, ask yourself this question: Once you have got that customer and they are starting to spend with you, how much are they going to be worth to you during their entire lifetime?
The reason I ask this question is because too often in business, owners don’t think about long term relationships, they just think about the here and now.
There’s absolutely no point in acquiring a customer if you’re not willing to put the work into keeping them.
We operate in a high trust-based economy.
Businesses spend a lot of time and money building trust with potential customers so that an initial purchase is made; to then not take it a stage further and build a relationship with that new customers is, in business terms, an absolute travesty.
I recently had the misfortune of encountering such relationship management, when I booked my car in for some warranty work to be completed.
I love driving cars and for the past 20 years, I have been a very loyal member of the BMW club. In that time period, I’ve had 7 BMW’s; my current vehicle is a BMW 7 Series.
You would expect a company like BMW to have impeccable customer service. You might be led to believe that they’d always think of the ‘long-game’ when dealing with their customers and not just see the one-off purchase.
Sadly, my recent experience of being a customer of BMW is indicative of quite the opposite.
Whilst a garage was undertaking the warranty work on my vehicle, they checked it over and happened to find two cracked rear wheels.
Even though the cracks appeared to be quite minor, I was informed that the wheels needed to be replaced.
It was explained to me, that the cracks on the wheels were caused by the ‘state of the British roads’ after a hard winter; that what had happened to my vehicle was caused by potholes.
My car is less than two years old.
I suggested to BMW that as they sold lots of cars to British road users, they should be providing products which can withstand the conditions that British drivers have to endure. Potholes are inevitable on roads and therefore their vehicles should be fit for purpose.
I questioned that if the issue was caused by potholes, why the front tyres had no visible damage; they bear the weight of the engine and would have suffered the greatest impact when driving on bumpy roads.
BMW, of course, disputed this.
To add insult to injury, as BMW believed their manufacturing wasn’t at fault, the damage to the wheels was not covered by their warranty and I was required to pay for the replacement myself.
As a long-time, loyal customer of BMW, was I disappointed?
Incredibly.
BMW were not thinking about their long-term game.
Over the past two decades I’ve purchased 7 expensive vehicles from them, yet that was not even taken into consideration. They weren’t thinking about their relationship with me, they were thinking about the quick ‘£1500’ they’d make on replacement wheels.
Interestingly, when I looked on the internet, I found that the issue I’d had with my alloys was not an isolated incident and many customers were disgruntled with how the damage had been handled by BMW.
The irony is that BMW will end up spending more money on advertising to try and tempt me to buy my next car from them, than they would have spent had they simply paid for my alloys.
I wonder if Mercedes treat their customers this way? I know Tesla do not.
The moral of the story?
As a business owner, you’ve always got to think about how you play the relationship game with your customers.
What do you do in your business to maintain a good relationship with your customers? Are you thinking long-term relationships or short-term wins? When a customer throws a challenge at you, are you thinking customer service? Or are you thinking money?
Just how damaging short-term thinking can be to even the most successful company, can be seen from what happened on a recent United Airlines flight.
On a flight readying for departure to Louisville International, United Airlines put out the call to offer four passengers airline vouchers in exchange for them vacating their seats. It transpires that these seats were required for United Airlines staff members, who needed to travel to the destination airport.
When no passengers offered to give up their seats, the airline randomly selected four people to leave the plane. Three passengers vacated their seats without too much fuss, however one gentleman, a doctor, refused to move.
How did the airline deal with this issue?
United Airlines involved Aviation Security, who came aboard and physically removed the doctor from his seat.
Essentially, their strategy for dealing with the situation was to physically assault a paying customer.
Unfortunately for United Airlines, other passengers on the flight were filming the situation unfold and the video very quickly went viral.
You can imagine how much money a company like United Airlines spends a year on convincing people to use their services. Through an act of stupidity like this, they have not only lost a customer in the doctor (and whatever they had to compensate him with), they have been publicly shamed and everyone that has seen the video is likely to think twice before booking a flight with them in the future.
I urge you as business owners to start thinking long-term strategy and about how you’re going to take care of your customers.
Always keep in mind the lifetime value of your client.
The longer you keep that client on board, the lower your acquisition cost is going to be.
Ultimately, if you don not want to service a client, your competition will. The last thing you want to do is make your competition grow, because if they are getting stronger, it means you are getting weaker.
Remember, failing to learn is learning to fail.
