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Build Your Business: Trends
The Most Expensive Sale You’ll Make
A 2007 study by Harvard Business Review shows increasing value as measured by net profit on sales for new customers vs. repeating six-year customers.
Every business needs new customers, and adding them is the most common way to achieve growth. However, it may not be the ideal method for doing so. Before we dig into why new customers are so expensive, let’s take a look at the four reasons why you need to add them in the first place.
All businesses experience attrition, which is the natural loss of customers over time. They may have gone out of business, divorced, retired, died or left you for another vendor. Perhaps there’s a new management team or committee head with new ideas of where to go for the services you offer. Regardless of the many reasons, customers leave and their revenue must be replaced.
Secondly, there’s a need to replace unprofitable or high-maintenance customers. They are the “pain-in-the-you-know-what” customers that we just can’t please. They always are asking for a discount on the work you deliver or can find something wrong with the most perfect job. At some point, you will mutually decide to part ways. Hopefully there won’t be too many of these.
The next reason to add new customers is to grow the top-line revenue of the business faster than you can with other methods. Top-line revenue is emphasized because simply adding new customers does not add much to the bottom-line profit — at least not in the first year or two. Adding new customers should be considered a long-term investment.
Finally, you may find yourself in the position to reduce your exposure to big customers. This happens often with contract printers. Customers may start small and then start to dominate production.
After major growth, they leave for a bigger contract printer with cheaper prices, better terms, faster turnaround times or something else. This happens all the time and the contract printers find themselves with a huge hole that needs to be quickly filled.
COST TO ACQUIRE
Marketing has changed a great deal in the past few years as more firms move online and go digital. The amount of advertising “noise” now is so great that trying to gain new customers with a few ads and fliers is like yelling into a windstorm. Not only are you faced with more competition for attention, but the sheer number of ads, emails and other messages simply is overwhelming.
Getting and holding a prospect’s attention requires much more research, targeting, messaging, education and engagement. This is expensive and — more importantly — time consuming. One recent study on customer engagement and development revealed that it takes nine to 16 months to attract a new major client (one with the potential of generating 5% of revenue), depending on the industry.
Many small businesses are disappointed or disillusioned by the response to their advertising and marketing spends. It’s understandable because there’s no order or system to it. They don’t measure or track their responses or efforts. This often is called “hope marketing.” It’s akin to gambling and the money spent is completely at risk.
If you’re losing customers because they aren’t a good fit, then change the way you attract prospects. Defining the exact profile of your ideal customer is necessary to determine if he truly is a good fit for your business. It’s pointless to spend time and money acquiring a new customer that you’ll struggle with moving ahead.
How much will this actually cost? The cheapest approaches are word-of-mouth (WOM) and client referrals. While not free, you’re really measuring opportunity cost: the expense of your time if you were using it to produce billable product instead of prospect development that may not convert.
WOM and client referrals only go so far. While they’re still the most common ways to market for small companies, they are random, undependable and unpredictable. In the bigger picture, you can count on some percentage of growth from this area, but it’s variable.
How much budget should you set aside for marketing and sales to acquire new customers? The numbers vary by industry. They range between 4% and 60% of top-line revenue. For industries similar to ours, the range is 4%-20%. Even if you are a small shop with $200,000 in annual sales, the range would be $8,000-$40,000 per year, or $667-$3,300 per month.
OTHER COST FACTORS
New clients don’t know you and are looking for you to prove yourself to them. They’re taking a risk to work with you and, as such, want to minimize the risk. Therefore, the focus usually is on price. You can gradually raise prices, but it’s a slow process. Take that into consideration when negotiating your first order.
New customers also often are considering other vendors. Your competitors also want the business and most often use price as their club. Customers so focused on the cheapest price never are loyal. Thus, you run a high risk of spending time and money to develop a transient relationship.
Finally, there’s a proven strategy to break even on the first job so you can profit in the future. Simply put, if you know your costs, look to bring on a new client at the break-even point. Your pricing doesn’t have to be rock bottom, but you need enough margin to cover your acquisition cost. There are numerous examples and strategies that prove longtime clients are much more profitable than new ones.
A study by the Harvard Business Review tracked multiple industries’ client retention during a six-year span. The average profit annually for a one-year customer was 6% on sales. Remarkably, the average profit for a six-year client was 43% on top-line sales. That’s an enormous difference and the driving reason to do everything in your power to retain an established client.
For decorators working with schools, community organizations and nonprofits, the time spent answering numerous questions, getting committee approvals and anything that isn’t directly tied to production can eat up all your profits. It’s a huge problem for small operators working out of a storefront location where random walk-in traffic is common.
Another part of the educational element is the time spent explaining why you differ from the competition and how it’s reflected in your sales prices. These conversations take considerable time to develop. To speed them along, you need “social proof.” This has become a big deal in the past few years with the rise of social media.
It comes down to how you independently prove your claims. This is the cost of your online reputation — Yelp, Google, Angie’s List, BBB, reviews and so on. There’s a cost to maintain your account on many of these sites. They range from $10-$30 per month. If you do a lot of local work, it’s definitely worth being on the major sites.
Develop your profile. Get reviews and testimonials. Respond to others posting about your company and your performance. But it takes time in addition to actual subscription costs.
Small businesses commonly fail to establish measurable marketing criteria. The old-school mass-media channels — newspaper, Yellow Pages, radio and television — were notorious for poor results. Even direct mail, done incorrectly, fits into this category. If you can’t measure it, you shouldn’t be using it. I call this “missionary advertising” because you’re trying to convert an anonymous audience to your offer.
This is all changing rapidly as digital marketing methods — metrics, analytics, what to measure and how to measure it — take over the advertising industry. The available tools can slash your acquisition costs when used as designed.
Once familiar, you quickly will discover modern analytics turn advertising and conversion into a science. Better yet, they take the mystery and gambling out of the process. They turn it into a virtual money machine where every dollar invested delivers some multiple of the investment.
Once you’ve landed a new customer, you will have design-development and approval costs. This is very time consuming because the customer still is being cautious and extra critical of the work you do. Cost drops dramatically over time and the more you repeat a job, the less time you spend on approvals. This is one of the reasons custom work is so expensive compared to stock designs that get printed repeatedly.
Next come the setup costs. Think about those four-color process or simulated process jobs when you did them the first few times. How many screens and film remakes did it take?
One of the things we dread is matching existing images from prior vendors. Most often, we don’t have access to films or spec sheets. It becomes a guessing game and a protracted, painful process. More often than not, the sample is of poor quality and we have to determine just how much better we can make the new print. It may sound weird, but if the client has old inventory of inferior product, great new work will totally kill any remaining sales of the old shirts.
Finally, there’s the customer service cost on the follow-up after the order is delivered. This amounts to making sure the counts were correct, quality met their expectations and any other concerns. If the customer was coming from a competitor, he will be accustomed to one kind of experience. If he is new to decorated apparel, hand-holding always is required.
With the first job delivered, costs still continue to accumulate. Studies show that as many as 80% of new customers will only order once from you. What’s going to keep them? This is called customer contact
time and it means more sales calls and follow-up to develop confidence, connection and engagement.
All things considered, developing new customers is seven times more expensive than increasing sales or sales frequency from existing ones. Hopefully you have a better picture of just how expensive it is compared to other ways of increasing sales.
Mark A. Coudray has been an active member of the Academy of Screen Printing and Digital Technology since 1989, and has written for Impressions since 1978. For more information or to comment on this article, email Mark at email@example.com.
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