Here's part of a company's profit and loss statement: This year's sales are $40, and costs of goods sold are 50% of sales; so this year's cost of goods sold are $20. You've probably heard the statement that customer acquisition costs 5 times more than customer retention. So let's say that we have two situations. In the first situation, that $40 of sales all came from existing customers. We'll say that the cost to maintain those customers was $2. So our costs are up to $22 at this point. That's an $18 gross profit (45% of sales) before we deduct all our fixed and other costs.
In the second situation, that $40 of sales was all from NEW customers because we lost all of the previous year's customers. Therefore, our acquisition cost was $10 (or 5 times the $2). So our costs are up to $30 at this point. That's a $10 gross profit (25% of sales) before we deduct all our fixed and other costs.
So looking at these two extreme situations (the first with 100% retention and no new customers, and the second with 0% retention and all new customers), there's an enormous difference. Gross profit is almost twice in the first situation than in the second situation.
It's really simple math. It's so simple that an Ivy League-trained CEO could do it. But many don't.
Too many companies are focusing their strategies, their structure, their training, their bonuses, their marketing collateral, and their marketing budgets on acquisition, when a simple look at a P&L would point them in a more efficient and wise allocation of dollars.
In a perfect world, the CEO wants the $40 in sales from the existing AND the $40 in sales from the new. But the perfect world often requires unlimited resources, which exist for no one. So the question is one of focus and allocation.
Allocate resources in the people, processes, technology, and relationship-building activities that will build retention and long-term organizational growth to build a better bottom line.
Executives should do the math.
In the second situation, that $40 of sales was all from NEW customers because we lost all of the previous year's customers. Therefore, our acquisition cost was $10 (or 5 times the $2). So our costs are up to $30 at this point. That's a $10 gross profit (25% of sales) before we deduct all our fixed and other costs.
So looking at these two extreme situations (the first with 100% retention and no new customers, and the second with 0% retention and all new customers), there's an enormous difference. Gross profit is almost twice in the first situation than in the second situation.
It's really simple math. It's so simple that an Ivy League-trained CEO could do it. But many don't.
Too many companies are focusing their strategies, their structure, their training, their bonuses, their marketing collateral, and their marketing budgets on acquisition, when a simple look at a P&L would point them in a more efficient and wise allocation of dollars.
In a perfect world, the CEO wants the $40 in sales from the existing AND the $40 in sales from the new. But the perfect world often requires unlimited resources, which exist for no one. So the question is one of focus and allocation.
Allocate resources in the people, processes, technology, and relationship-building activities that will build retention and long-term organizational growth to build a better bottom line.
Executives should do the math.
