Last week we looked at the way to build a Revenue Plan for a company, and this week I want to take a different angle at this task. This came up with a Client last week as well. Timing like this is just wonderful. I was already thinking about the topic and it came up. Meant I had a great set of content handy for that meeting. Luck favors the prepared!
In this case, the Client I was talking to was a company that does Signs and Graphics Design. They were introduced to a new customer of their own. This company was started as a Sign Company and moved into Graphics Design. The customer was looking into a Graphics Design job for a Flyer. I asked my Client if he was going to just do the design or print the Flyers as well.
His response was that he offered to the Client to do the printing if they wanted. My challenge to this was to make the printing the primary offer. Then he could find a partner to do the printing, mark up the price a bit and make more money on the job. There are some forms of Signs that he does that for, so it made sense to me.
The reason I went there was three Concepts that are linked in this case: Cost of Customer Acquisition, Life Value of a Customer and Incremental Margin. In this case, the Customer Acquisition cost was fixed. The time and effort put into it was already expended. The Life Value of the Customer would go up if there were additional services that could be sold. This would create Incremental Margin Dollars in the deal (even if the Margin Percentage went down). The Graphics Design would have to go to some printer, so why not my Client's Printer? There was essentially no more work involved and the potential for additional profit.
This leads me back to Cost of Customer Acquisition. When a Customer comes on board, you will have spent some amount of time and money to get him or her. All of that expense needs to be balanced by the profit from the purchases that a customer will make. If you add that together, this becomes the Life Value of the Customer (which can be calculated as either Revenue or Profit). To make a sustainable business, the Life Value of the Customer (in Profit) needs to exceed the Cost of Customer Acquisition.
There are several ways to improve this Formula from where you are today. Examples are:
- Focus on Ideal Clients. Ideal Clients are those most likely to buy your products and services. If you spend your time and money on them, it will lower your Cost of Customer Acquisition.
- Offer more Products and Services (aka Bundle). If you can offer more, then the average transaction value increases. If each transaction takes no additional resource, then you have increased your Life Value of a Client. This provides more Incremental Margin.
- Improve Customer Retention. By keeping existing customers happy, you will lower the Cost of Customer Acquisition. All research shows that keeping an existing customer is much cheaper than attracting a new one. On top of that, by getting repeat business you have improved the Life Value of a Client.
So when you think about building a Marketing and Sales Model as we have discussed. Keep this part in mind as well. Build your company to minimize the Cost of Customer Acquisition and maximize the Life Value of a Client. The easiest way to do this is through Customer Retention.
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