Monday, 7 February 2011

Having too many customers can break you

What many businesses don't get, is that the customer acquisition and maintenance cost are normally far greater, than the money the customer will spend with you on their first sale.

On average a business need to bring each customer back at least 5 times before they will begin to generate a profit and become good quality Cash customers.

One business I looked at had just over 700 customers, but was struggling to sell into their customer base.

  • Initially I asked for a historical list of how much each customer had spent with the company.
  • My next question was how many customers regularly do business with the company. Of the 700 only 70 regularly did business with the company.
  • Now comes the crucial question ‘of the 70 how many pay their bills on time or at all?’ now we are down to 30.
  • I then asked for credit ratings for the 30 left and that brought the number of good Cash customers down to 20.

The company had made the fatal mistake of not understanding the cost of customer acquisition and maintenance. The expectation was that all customers are equal and so they were shared out equally amongst the sales staff.

The average business spends 6 times more trying to win a new customer, than it does generating new business from an existing customer.

In recognition of this fact the solution required a combination of reducing the size of the sales team and providing a more appropriate level of account management.

The company now focuses on supporting the top 20 accounts with sales executives. The other 680+ accounts are managed by a combination of a telesales team and the bailiffs.

  • A typical fully loaded Sales Executive cost to the business was £100,000 and there were 30 in the team including managers. Each sales executive handled over 20 customers. The business was spending around £3m supporting customers who had no intention of buying. In fact only 1 out of every 35 customers was worth supporting.
  • Contrary to popular opinion creating a smaller Sales team increased motivation, productivity, salary and sales. The new smaller team had a reduced management overhead and had improved the profit from existing turnover by around 7%.
  • The Sales executives had more time to spend with each of their customers that meant they delivered a better quality of service and this in turn encouraged the customer to place more orders.
  • It was true that the business had redeployed staff but by doing so it focused on creating a better staff moral and secured the jobs of all that remained.

The business was now running much more efficiently, it has seen an on-going improvement to turnover, and is in a much better place to manage the growth of the sales team going forward.

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