What Does It Cost To Lose A Customer?Written By: Ron Slee
Article Date: 07-04-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
The true cost of your business is what it costs to acquire and retain customers.
The traditional cost accounting structures we all have used start from the false premise that there is really only one cost: Total Cost. Then we start messing with variable costs (such as personnel) and fixed costs (rent, for example). We try to increase the variable cost and decrease fixed costs. This is all fine and dandy and has served us well for many years, yet it leads us to poor decisions.
For instance, during the 80s, when operating costs were under serious scrutiny, we looked at people costs and productivity measures and cut head count. We also moved capital assets off the balance sheet and took on operating leases. We got good at gimmicks.
But the true cost of our businesses is what it costs to acquire and retain customers. Do you know what that cost is? How does your accounting system track those costs? I think you'll agree with me that the answer is "not very well."
I'm not saying our systems are not doing the job, but rather I'm suggesting that we, as managers, are not doing ours. Technology and engineering are way ahead of management these days. The equipment coming off production lines today is so far superior to what we had even as recently as five years ago, it's staggering. Yet what has changed in how we manage. There have been significant changes in every aspect of the job - personnel, processes, customer service, profitability, market coverage - but what has changed in management?
You've probably calculated how much it costs to generate a parts sales order or a purchase order. But have any of you calculated your customer retention rate in the parts department or the service department? That information is priceless. It will put a serious dent in your egos when you see the actual number of customers that leave you each year.
In AED's Product Support Opportunities
Handbook, customers told us that 44 percent of them had left the OEM dealer and had service done from other sources. What does it take before we take action? We've been so successful at how we perform our jobs in parts and service, we've lost over half of the parts business and more than three-quarters of the service business.
So back to the question of accounting or financial systems: Cost accounting is fine to a point, but today we have a much more serious need from our financial information.
We need to know how much each machine we sell generates per year in parts and service. The Product Support Opportunities Handbook gives you a model.
We need to operate effectively. AED's Product Support Best Practices Handbook gives you some benchmarks.
We need skilled and trained personnel who know what doing a good job looks like. AED's Product Support Handbook outlines all of the jobs and the standards of performance.
But all that is wasted if we don't know what it costs to lose a customer.
The 80:20 rule doesn't apply to us - 80 percent of the sales coming from 20 percent of the customers. We are now closer to 90:10. And that ratio is truly frightening. What if you lose one of those large accounts? The results are not good, not just for the parts or the service departments but for the entire dealership.
So, do you know your costs? Unless you know how much it costs to lose a customer and how much it costs to acquire one, you don't.
[ TOP ]