The hidden cost of customers

When talking to start-ups I often hear them say “Well, it costs almost nothing to put on a new customer”. What they mean is that the marginal cost of one more customer, in terms of computing and networking resources, is almost nothing. However, there’s a lot more to bringing on and supporting a customer than that. And some of those other things can really bite you in the backside.

To be clear, I am not referring to what it costs you to get a customer – the acquisition cost. I am talking about once the client has decided to buy your service. There are a number of areas of potential cost that you need to consider:

Contracts:
This may be a one-off cost for a consumer product or service, you just get some T’s and C’s drawn up and put them on the website. However, if you are selling in the B2B space and dealing with large corporations, this can be a major issue and different for each client.

Registration:
It is a mistake to assume that clients will self-register and so there will not be a cost. You may require them to give you information that is not readily to hand, or requires some validation. They might not easily understand what information you need, or have to go through a lengthy online dialogue to submit it, leading to high drop-out rates. You may have to phone them up and take them through the process, which is much more expensive.

Fulfilment:
Does the service require you to physically send them something, like a security device, or reader of some sort? Physical fulfilment will cost extra, delay the start of service take-up and possibly cause some to drop out.

Billing, payment and debt collection:
It sounds obvious but you have to send a clear and understandable bill and collect the money. Remember transaction charges, from credit cards companies to Paypal. If you are dealing with corporates, you may have to integrate with their payment systems, which will differ and may incur transaction charges. And you never get all the money from everyone, each new customer can also represent a new line of credit you are extending. You are not a bank, it costs you money.

Customer Service:
Customers get stuff wrong and need help to get using your product or service. This is a potential black hole for resources and can kill your business if you get it wrong. Generally, new customers require more support, particularly for more complex and high-value services. A steep increase in sign-ups will create a steep increase in customer service, so you need to be ready for it. Also, as calls increase, efficiency often falls because the systems and team get overloaded. That one extra customer could be the straw that breaks the camel’s back.

It is possible to design your service to minimise the costs in some of these areas but your primary aim is to develop what the customer wants, not what you want to deliver. Sometimes you just have to accept that’s how it has to be and swallow the cost. You are not in a position to dictate to the customer (I don’t recommend that as a long term strategy in any case, even for the likes of Ryanair).

An over-optimistic evaluation of the costs of supporting customers will cause you to underprice your service and make a viable product unprofitable. Think about all aspects carefully and keep them under review as you develop and extend your product set.

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