How getting too many new customers can send your business broke!

We’ve all heard the statistics, 8 out of every 10 new businesses will fail in their first 5 years. Of those that survive, 4 out of 5 will then fail in the next 5 years. So why does this happen?

One of the main reasons why many small businesses fail, is that they get too many new customers. What’s that I hear you say? You thought you were supposed to get new customers. Well yes, you do want to get new customers, but only if they come back and buy from you at least 5 times. Let me explain what I mean.

Each time you market to a new customer it costs you money. This is known as your acquisition cost. To calculate your acquisition cost, you need to workout the cost of your marketing, (i.e. the cost of your ad or commercial) and then divide that by the number of people who buy from you as a result of your marketing. Note that we’re only interested in the how many people buy from you, not how many come into your store.

What many people don’t realises, is that their acquisition cost is normally greater, than the money that customer will spend with you on a first time sale. In fact, in the average business you need to bring each customer back at least 5 times before you begin to make a profit on them.

For example, let’s look at a bakery. Now if a bakery spends $300 per week on advertising, and then as a result gets 30 new customers, their acquisition cost per customer is $10. Now if each new customer spends $5 when they come in, and of that only $2.50 was profit and $2.50 was hard cost, that bakery has actually lost $5 on each new customer. If of those 30 new customers, 20 never came back, the bakery has actually lost $100 on that marketing campaign.

Understand that the average business needs to bring a customer back at least 5 times, before they start to make a profit from that client. But amazingly enough, the average business spends 6 times more trying to get a new customer to come in to their business, than they do trying to get an existing customer to come back.

So what’s the answer? Spending more time and effort on marketing to get your existing customers to come back, and less on getting new customers through your door.