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Have you calculated what your customer is worth? Most entrepreneurs haven’t … as a matter of fact statistics show that 97% of entrepreneurs don’t know what their customers are worth or cost them to maintain.

Simply put if the gross profit (sales – cost of sales) is less than what you spend to look after that client (account management, traveling, entertainment, etc, etc), then they not really a customer are they?

 

Now before you go do the calculation and fire your entire existing customer base, bear in mind that there are two factors to consider:

 

  • Uptake Period: The period in which you grow a customer from buying R1,000 (gross profit) a month to R10,000 (gross profit), or also the period in which you will close the “big deal” or “first deal”. Most uptakes take 6-12 months based on your company’s industry and target market.

  • Success Ratio: The percentage chance of that customer growing to a R10,000 a month customer in the future.

 

Scenario: You are on online or retail store selling a variety of product and services to consumers. You are 5-months into the relationship with a client currently purchasing R1,000 (gross profit) per month a with an uptake period of 12-months, and the chances of the client achieving R10,000 per month being 50% at the end of that period, you would simply calculate it on worst case scenario based on zero growth as follows:

 

(R1000 x 5months) + (50% x (R1000 x 7months) = R8,500 Gross Profit for year 1

* Assumption: he doesn’t increase his purchasing in the remaining uptake period

 

Now because he is a difficult customer your account manager (with a salary of R30,000 per month) spends 10% of his time on this client (equates to 16hrs 50min per month or half a day a week), and spends approximately R1,000 per month on travel and entertainment to and from this client on a weekly basis.

 

((R30,000 x 10%) x 12) + (R1,000 x 12) = R48,000 Customer Relationship Cost for year 1

 

So in essence your customer is costing you (NOT generating a profit) of:

 

R8,500 – R48,000 = -R39,500

 

Is that the type of customer you want to focus on? You will be surprised at how many entrepreneurs do not do this calculation and end up driving their businesses into the ground then look on in disbelief a year later.

Just to achieve breakeven your customer needs to be generating the following gross profit in the remaining 7-months:

 

(R48,000 – (1,000 x 5months)) ÷ 7month = R6,143 Gross Profit per month

 

Work out the potential worth of your customer on an annual basis, and based on that, re-strategize and redirect your focus, time and energy.

In the original scenario, on the assumption that the client was a difficult client with limited growth potential, you could have simply reduced the amount of site visits to 1 per month by an account manager and allocated 1% of their time (equates to 1hr 40min of his time per month). That would have reduced the cost to approximately R6,600, giving the client a net worth of R1,900.

 

((R30,000 x 1%) x 12) + (R250 x 12) = R6,600 Customer Relationship Cost for year 1

 

This would have given you:

 

R8,500 – R6,600 = R1,900 Gross Profit for Year 1

 

Now bearing in mind that we have used small sales profit margins in these examples focused on online or retail product/service sales where they have a large customer base, but what if the profit margins were bigger? The same formula would apply, taking into account the higher the profit margin the more time your account manager is probably spending on a client, the less clients you have, and the more account management expenses you would have, and the smaller your margins are.

Understand the net worth of each of your clients to your business, so you know which customers to focus on and nurture, and which you probably need to fire (see artical "When Should You Fire A Customer? ").


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