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The Cost of Customers

Disciplines > Marketing > Understanding Customers > The Cost of Customers

Marketing costs | Sales costs | Service costs | Failure costs | Discussion | See also

How much do your customers cost you?

The ideal customer turns up at your door, buys your products, walks away and is never seen or heard of again until they want to buy something else.

But few customers are like this. You first have to find and persuade them, then you have to handle subsequent interactions with them, whether these are complaints or requests for help. And all of this costs.

Marketing costs

Marketing is a significant activity, all of which is targeted at customers and which has to be paid for.

Inbound marketing includes all the research about customers, what they need and how to persuade them. Outbound marketing includes all the traditional marketing activity such as advertising, PR and so on.

An approximation of total marketing costs within a company are often quite easy to determine -- just add up the salaries of all the marketing people, then add in the marketing budget. Other people may also be involved and, for greater accuracy, costs for these should be included, for example where technical people present at conferences, spreading the name of the company.

Determining marketing costs of individual products is more difficult and approximations may need to be made.

To calculate the marketing costs per customer can become complex. A simple way is to divide marketing costs for a product by product sales numbers.

Sales costs

If you can separate marketing and sales, the cost of sales can be divided into two parts.

Sales force costs are the cost of persuading the customer to sell, and typically are mostly made up of the cost of paying sales people. Business-to-business (B2B) may also include costs of doing demonstrations and presentations to buyers and everyone involved in this. Some customers take more persuading than others, and the cost allocated to them is consequently higher.

There is also an administrative cost in selling, including taking the order and shipping the product to the customer. For large-scale selling this should not be big.

Some products also need to be set up properly for individual customers, users trained and so on. These costs may be borne by the customer, in which case they are not included in 'cost of sale'. 

As with marketing costs, the cost of sales for each customer or product may not be easy to calculate, with an approximation derived from aggregates the only value that can be used.

Service costs

After the sale is completed, there may also be costs incurred.

Every time a customer contacts you, there is cost in handling the call, whether it is a simple query or a product problem.

Service costs can vary greatly between customers. Product failures aside, some customers may want a lot of attention, while you hardly ever hear from others.

When customers take out a fixed-cost service contract, then this can exaggerate the situation, where some customers feel they can call you about the smallest of items and make all kinds of demands.

Failure costs

Perhaps the worst costs of all are those associated with the failure of your products or services.

Recommendation is a key reason why people buy, but if a friend tells you of a bad experience with a company or its products, then the chance you will buy from them goes down significantly. When customers are unhappy, they may tell you but, more disastrously, they tell other people. The lost sales that result from your failures can be very expensive indeed and almost impossible to count.

Discussion

While you cannot understand all customer costs, seeking to measure them, at least roughly, can give you an idea of this. In the end, customers pay for themselves in the prices you charge, but if this component of price is high, then it can make you uncompetitive.

If you can reduce customer costs, then you can create a new business model where you can increase profits or reduce price. This is effectively what internet businesses do when they automate all interactions.

If you can identify the costs of individual customers, you can discover whether they are profitable or not. This can be particularly true of large customers who first demand deep discounts and then require extraordinary service. It may seem counter-intuitive, but the best thing you can do sometimes is to 'sack' such big customers, refusing to sell to them.

See also

Communication, Sales