Are Your Customers Worth Every Penny You Spend On Them?

How far will businesses go to acquire new customers and keep them in the fold? For many, the answer is way too far. Whether they’re providing costly services and goods for free, or giving overly generous price cuts, some organizations wind up doing more harm than good while chasing clients.

Where do you draw the line, though? When do customer acquisition and retention costs outweigh the revenue they bring in? Those are questions that many businesses struggle with, because they don’t have the proper insight into the specific financials. Profitability analysis tools can shine a light on those figures and help you determine if your customers are worth every penny you spend on them.

Customer acquisition costs remain higher than retention expenses

It’s a well-known fact that bringing in new customers costs more than retaining existing ones. The exact figure can vary depending to the source, but according to Invesp, attracting a new client is five times more expensive than keeping current customers on board.

Despite those figures, many companies continue to spend more on customer acquisition costs than retention. A 2014 Econsultancy survey revealed that 40 percent of businesses were more focused on acquisition, while only 15 percent dedicated more resources toward client retention.

Such trends are troubling, as the short-term gain of bringing in new clientele could cause long-term damage if they don’t provide ample lifetime value (LTV). According to Ometria’s Edward Gotham, your ideal LTV should be well below your cost of customer acquisition (CAC) – at a ratio of 3:1, to be exact. Any lower than that, and you run the risk of spending far too much bringing new customers on board. If your CAC to LTV ratio is closer to 1:1 or even less, that’s a good indication your clients are actually costing you money.

Figuring out which customers are cost centers

The unfortunate reality is anywhere from 20 to 40 percent of your customers are probably costing you money. The reasons for that value gap can be myriad, which is why profitability analysis solutions are needed to bring them into focus.

The very tools you use to attract new customers or satisfy existing clients could actually be losing you potential revenue, and those expensive practices need to be dealt with immediately to prevent lasting damage. Rewards programs and customer loyalty discounts are great ways to maintain strong relationships and increase retention numbers, but they can work against you if they give too much away.

CommunityAmerica Credit Union experienced such a scenario with its debit rewards program. After leveraging profitability analysis solutions to audit customer acquisition costs, the financial institution discovered that the program’s high costs actually outweighed any value it provided. As a result, the credit union eliminated the service for new clients and was able to remove a major cost center.

All businesses should comprehensively comb through their service menus, product lines, customer acquisition practices and retention strategies to identify expenses that could be cutting into their bottom line. Profitability and cost management solutions provide the microscope needed to audit various processes and bring long-buried financial issues to the surface.

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