When I ask small business owners about their customers, I often get long pauses and even blank stares. Many business owners are so focused on their products or services that they forget to pay attention to their customer numbers. One of my first tasks is to shift that focus onto the customer. Without customers, there IS no business. Therefore, it is critical to every business to know precisely how they get and keep customers.
There are three key metrics every business owner needs to know about those customers:
- Customer acquisition cost
- Conversion rate of prospects to customers
- Lifetime value of the customer
First, its important to know how much it costs to get a customer.
This dollar amount is made up of marketing and advertising costs, and can include discounts for first-time customers, giveaways, loss leaders, promotional items, marketing campaigns, advertising media, and anything else that goes into getting a new customer to buy. For example, perhaps you offer a 2-for-1 meal deal for new customers at your restaurant. If someone has never visited your restaurant before, you offer them a second meal at a price equal to or less than the meal they purchase. This allows a single person to come back again for a free meal, or offsets the cost of a companion’s meal during that first visit. Let’s say that represents a $50 value.
Of course, to offer such a discount, you need to know how much it costs you to make that meal and your profit margin per meal. Using a 40% profit margin, a $50 value meal should not cost you more than $30 ($50 less your $20 profit). That first visit of two people, then, actually costs you $10. The new customer buys a $50 meal, which gives you $20 profit. The free meal actually costs you $30, but you’ve received that $20 profit you didn’t have before, so the real cost to you of bringing in those two people is $10 for the food, plus a portion of the marketing effort that attracted those customers. For example’s sake, we’ll make that another $10.
You’ve had two new people eat at your restaurant for a total out-of-pocket cost to you of $20. If those customers come back — and it’s your job to ensure they have such a good experience that they WILL come back — anything they spend beyond that initial $20 is new revenue that you would not otherwise have had.
Wouldn’t you gladly spend $20 if you knew it was going to result in $100 or more of new customer revenue?
Next, how many prospects become buying customers?
Our restaurant owner might ask, How do I know if people come back to my restaurant? Every business MUST capture contact information for any customer who approaches the company. For our restaurant, the easiest way to do that is to ask for contact details when the customer takes advantage of the special offer for new customers. By the way, this offer is made by the server after asking each customer, “Have you been to visit us before?”. For repeat customers, provide a service quality feedback card that they can fill out at the end of their meal, and ask for contact details then “To become a preferred customer”. Everyone likes to feel special. Another option is to ask “Would you like to receive our discounts and preferred customer offers by e-mail?” or “Would you like to join our Preferred Customer club?”
Once the customer is in your database, you can track sales to that individual. If the customer answers “Yes” to the question of whether they’ve been at that establishment before, the server then asks for their e-mail address or phone number so they can look up the discount or special offer that customer has already qualified for. The server can say something like “Oh, you’ve probably qualified for one of our preferred customer offers, then! May I get your phone number or e-mail address so I can look it up?”
And yes, EVERY customer who comes back for another visit is a “preferred customer”. Shouldn’t they be? The special offer at subsequent visits can be a free side dish, appetizers, drink, dessert or any other item that complements their meal. Rather than make it “a free piece of hot apple pie” — something specific that is not going to appeal to every customer and therefore the customer feels it’s “wasted” — make it an item of choice from a list of possible items. Of course, these items should be low net cost to you as the restaurant owner, but high perceived value to the customer.
Doesn’t it make sense that if you give the customer something worth 10% of their meal value, you reap the remainder in revenue? And that well-served customer will come back again and again, bringing their friends, talking about the great deals they get at your establishment, and delivering to you significant revenue over time.
Additionally, the psychological value of treating every customer as a “preferred customer”, surprising and delighting them with some special offer every time they visit, is enormous. How hard is it for a customer to decide to choose your establishment over another restaurant where they’re given no special treatment at all?
The same principles apply to other types of businesses. What does it take to make a customer buy, once they’ve contact your company? I have strategies that work for any business to increase the conversion of prospects into customers. These include ensuring the prospect is a qualified customer (that they need, want, can afford you and are ready to buy) and overcoming objections.
Finally, what is that customer worth to you long term?
The lifetime value of a customer is how much money that customer brings into your business as long as they are a customer. Many businesses spend a fair bit of money acquiring a customer but then drop the ball in not serving that customer again and again. If you’ve got a database of customers that haven’t bought from you in 6 months or more, you are sitting on an untapped asset that could be providing additional revenue. Customers often need to be reminded to do business with you, and it’s a simple matter to keep in contact with them. Gentle, periodic contact is often sufficient to bring customers back into your business again and again.
The easiest customer to sell to is one who has already been satisfied by their previous purchase. Don’t let those customers go to waste, or drift to a competitor because you didn’t pay attention to them. They will gladly give you more money and more business if you just ask, and of course continue to provide value.
Once you know how much it costs to get a long-term customer and what that customer is worth over time, you can make better informed decisions about marketing and advertising, as well as every other aspect of your business.