How Much is Just Right? Invest Wisely to Find New Customers!

By Andrew J. Birol, President, Birol Growth Consulting, Inc.

We all know that finding new customers is the lifeblood of most companies’ growth. But doing this profitably is often elusive. Too much investment and we aren’t profitable, too little and we sacrifice growth. Meanwhile, we are constantly bombarded with proposals on how to find customers. Three examples are direct marketing, customer relationship management software, and certainly, the Internet.

But how much investment is enough? And how can we measure this? Unlike other functions such as manufacturing and finance, where measurement of the methods used is commonplace, sales, marketing and customer service groups often avoid scrutiny of how well their choice of tactics work.

There are many good reasons why sales, marketing and customer services really are not measurable and here are three common examples:

  • 1. “Sales is about building personal relationships, you can’t put a price on this!” It is certainly true that people buy from people, not companies. Therefore, investing in “face time” is critical.
  • 2. “If we didn’t invest in marketing, how could a prospect become aware of our company and products?” Investment in advertising is expensive and can take years to pay off. But the alternative, cold calling, is no fun and grows more expensive by the year!
  • 3. “No investment is more important than customer service when it comes to making a first impression on a new customer.” As they say, “You don’t get a second chance to make a first impression.” Also, it is often said that customers are most likely to leave a company because of bad customer service.
So is the answer to throw budgeting to the wind and spend at any cost to obtain customers? Obviously not, because we all know that business has to be profitable and controlled growth is essential. So what is the answer?

Fortunately, the answer is clear. By following one rule and taking three steps you can maximize your investment in finding customers. The biggest challenge will be to stay focused and never overcomplicate the steps to get this done.

  The Single Rule of Thumb

Invest enough to break even on a buyer’s first order and only close the kind of customers you will profit from over time.
It is critical that you do spend up to breakeven on new customers and be selective on who you are choosing to serve.

Software companies and equipment lessors are both great examples of businesses who can price their initial sale quite low and then, over time, earn great profits on upgrade and service contracts. As they do this, they turn one-time buyers into long term customers.

When implementing this rule remember that:

  • All new customers must have the potential of adding long term value to your top and bottom line
  • Customer relationships are built over the long term by consistently demonstrating value
  • The right kind of customers will be profitable

Once you have embraced the concept of initially investing to break even and make profits over the long run, the next job is to run the numbers and delight your CFO and accountants!

The three steps to measure ROI in finding customers

  • Determine your firm’s total cost of finding customers by simply adding up everything you spend on finding customers and then divide by the number of new buyers.

    All sales, marketing and customer service expenses can be simply added up across the company. As soon as you come up with a good estimate, immediately stop because you are close enough!

    Two examples of this would be Intel when selling chips to PC makers and HMOs when pursuing new large corporate accounts. In both cases, there are only a few new sales so the total cost of finding customers is easily determined.

     

  • Customers are worth what they pay you minus what you spend to find them

    The value of a customer is no more than the revenue they contribute minus their cost.

    The best example of this step is the direct mail and telemarketing business. Whether or not we want to receive “snail mail”, direct mailers are always mailing only as many pieces as are cost justified. When we stop getting a computer catalog it is because, on average, the recipients are not buying enough items to cover the costs of the mailing.

     

  • How you choose to find customers determines what you can spend on them.

    When you decide how you are going to market, you are really choosing the activities, channels and tactics and therefore the costs of finding your customers.

The stock brokerage business is a great example of this. Full service brokers are dramatically losing market share among those individuals who have started to buy and sell stocks over the Internet. The winners in this battle are companies like E Trade and Schwab who have clearly chosen a new method for finding customers. It is now up to the traditional brokers to find the kind of customers who will always prefer and are willing to pay for a more traditional and personal approach.

In conclusion, measuring and optimizing your investment in finding customers can be accomplished efficiently and without a company-stopping effort. The most important thing is to keep focused on the single rule, follow the three steps and always remember to keep it simple!


Articles by Birol Growth Consulting are © copyrighted and all rights are reserved. However, articles may be reprinted with prior written consent if attribution is included as follows:

© Copyrighted by Andrew J. Birol, President of Birol Growth Consulting, who helps owners grow their businesses by growing their Best and Highest Use ®. Andy can be reached at  (412) 973-2080, by email at abirol@andybirol.com, or on the web at www.andybirol.com.


Leadership Pittsburgh Pittsburgh Technology Council

Institute for Entrepeneurial Excellence

SMC Business Councils

Facebook LinkedIn Twitter Blog Blog

COSE Ten under 10 award Team NEO Success Award Top 10 Award Weatherhead 100 Award

 

Birol Growth Consulting, LLC
 941 Penn Ave, Suite 201, Pittsburgh, PA 15222
cell: 412-973-2080  fax: 866-349-9280
andy@birolgrowthconsulting.com
Copyright © 1997-2014 Birol Growth Consulting, LLC.
All rights reserved.
Website maintained by FADCS