By Andrew Dalglish - 29th August 2016 (Read Circle Research Article here)
What’s the cost of losing a customer? ‘A lot’ is the simple answer, especially in B2B markets where the pool of prospective customers is limited and each sale tends to be high value.
We can be a bit more specific about the cost of losing a customer though.
Various numbers are bandied around in this respect – acquiring a new customer costs five, seven, ten, even thirty times more than retaining an existing one. However, ignore any stats like these because they’re a red-herring. The cost of losing a customer differs wildly between businesses so you need to calculate your own ‘customer loss index’. Here’s how.
First, interrogate your sales data to identify customers who have broken their usual spending pattern, either by stopping spending altogether or by significantly reducing spend.
The next step is to invite these customers to a short survey which asks them why they’ve stopped spending or have been spending less. There could be many reasons. Perhaps demand for their products has decreased, maybe innovations in their business mean that they now need less of what you sell, or it could be that they’ve started buying elsewhere. Only the latter category – those who have defected to a competitor – are of interest as they represent lost sales.
Now go back to your sales data, pull out those customers who identified themselves as ‘defectors’ and look at how much their spend as a group has decreased over the relevant period (the length of this depends on your sales cycle). Then divide the value of lost spend by the number of defectors to calculate the average lost spend per customer.
To complete the picture, the cost of acquiring a replacement customer needs to be added to this. This can be calculated by adding up all of your acquisition costs (sales and marketing spend) and dividing this by the number of new customers acquired during the relevant period.
Finally, add the two numbers together and you now know the average cost of losing a customer.
Use this formula to calculate how much each lost customer is costing your business. It’s likely to provide a compelling case for investing in customer loyalty, especially as it’s a conservative estimate without any intangible costs such as negative word-of-mouth and future lost sales factored in.