Picture of person at counter dealing with two upset people pointing to a paper. Title image for The Cost of the Customer, When Revenue Creates Diminishing ROI

The Cost of the Customer

–From Dr. Tricia

“You want lots of clients, right?”

“Like everyone, your main goal is for the phone to ring, right?”

Voicemail: “I’d like to work with you; when can we start?”

I was genuinely puzzled by these statements until I realized that the anchoring bias across business is the assumption that more business is better. The bias is so strong that it overshadows strategic planning around customer acquisition. When I spoke about turning away business, working with the right people, and ensuring a win-win partnership, people got confused. The conversation about customer fit was so foreign that I struggled with scripts to ensure that potential clients didn’t feel rejected and that business owners, physicians, and friends did not automatically refer whoever they thought “needed me.” In Masterminds, I sometimes wanted feedback on a process, but I spent most of my time re-explaining that for me, more is not better.

The Cost of the Customer - First Principles

 

1. Clients/customers generate revenue.

2. The financial value of each customer is modulated directly and indirectly by factors such as risk, scope creep, and energy investment.

3. Taking a broader and longer view of customer acquisition and retention impacts both pre-sale and post-sale decisions, processes, and policies.

4. Failure to account for risk, scope creep, and energy drains creates a diminishing return on investment for organizations who work with the wrong customers.

Operational Definition of Return on Investment (ROI):

Return On Investment (ROI) includes time, money, and energy. While financial investment directly impacts ROI, time and energy are opportunity costs that may prevent us from engaging in more lucrative options.

Operational Definition of Diminishing Return on Investment

Despite the same or greater level of investment, the customer gradually provides less value. This lower value may be a direct lessening of revenue. It may also be that the amount of work or energy has increased with no accompanying increase in revenue. Thus, the value of the customer decreases when adjusting for time, energy and resource investment.

The Cost of the Customer - Risk

Litigation Risk – The likelihood that the customer will sue, thus decreasing the net profit of the engagement or costing the business more than the revenue they generated.

Reputation Risk – The customer is a squeaky wheel with passive-aggressive communication strategies. They are unlikely to communicate directly if they are unhappy and will not take responsibility for resolving the conflict. Rather, they will spread negativity about their experience to whomever will listen. 

The Cost of the Customer - Scope Creep

The customer asks for additional attention and services beyond the scope of the original agreement. At first, the organization agrees, either to be kind or to please the customer. However, the requests continue. Often, the increased scope is serviced not only at the same price but with requests for discounts or additional financial accommodations for the consumer. Hence, when value of the customer is remapped with the broadened scope, the ROI may be diminished or negative. 

Blind Spot Warning!

The Cost of the Customer - Energy Investment

In the same way that people undervalue the degree to which time impacts business success, they undervalue the degree to which their energy impacts success. Energy is not only physical energy but also emotional energy. Emotional energy fuels focus, drive, and creativity.

In many cases, businesses put energy into retaining bad clients. The energy drain is immense and diverts the business owners and employees from:

a. Delighting current great customers

b. Acquiring more lucrative customers

b. Focusing on the strategy that will provide more value to the business

In the same way, bosses lay awake at night figuring out how to change or fire a bad employee or partner, those dealing with a bad customer will divert generative energy to appease the bad apple instead of growing great ones. 

Why is this such a blind spot? First, as previously mentioned, the prevailing assumption offers that more business is better, so businesses tend to focus on keeping bad customers happy. Secondly, the cost of energy cannot be clearly delineated in a P & L statement. Finally, too many people have been told “don’t let them bother you.” Thus, the effort is misplaced into calming one’s own emotional reactions rather than getting rid of the people who cause them in the first place.