When it comes to the number of customers your brand has, more is not more. Or to be precise, more customers does not equal more profit. In fact, too many bad customers can actually lose your business money. Here are just some of the ways unprofitable customers can cost you money.
Most customers don’t come free, so it’s important that brands balance the customer acquisition cost (CAC) with the amount of money that customer will spend with the business in their lifecycle, aka their customer lifetime value or LTV (sometimes also called CLV).
If it costs you $100 to get a new customer but they only spend $80 with your business in their customer lifecycle, you’ve lost $20 on that customer. That’s why it’s so important that your acquisition strategy seeks out and converts customers who are likely to be the most profitable.
Knowing and understanding your most profitable clients can actually help you mitigate all of the other ways that unprofitable clients lose you money.
It’s easy to think that blasting text messages or emails to your customers doesn’t cost you anything. The actual service price difference between emailing 1,000 customers and emailing 6,000 customers might be minimal. But emails can have a high cost.
Email is now the most dominant — and often only — medium for brands to communicate directly to their customers. When a person unsubscribes from marketing emails, how can brands intervene to drive additional purchases or re-engage lapsed customers? They can’t.
When brands send irrelevant emails with enticing discounts to their entire customer base, the people who unsubscribe may very well be the most profitable customers, especially as the most profitable customers for a business often do not use promo codes or make impulse buys with last-minute discounts.
If your most profitable customers are unsubscribing from your emails, your emails are losing you money.
Just as sending an email to your entire customer list might seem free, so it might seem similarly low stakes to blast a promotion or discount to every customer in your database. However, this could cost you real money.
For example, one of our clients discovered that their most profitable customers are not impulse buyers, indicating that blanket promos that trigger sales don’t have a high impact. Instead, the brand engaged in communications that our behavioral and attitudinal data indicated would have a high impact. The brand estimated that sending a single promotion to high LTV customers would provide a $23,246 increase in net profit. But if they sent low LTV the same promotions, the result would have been a net profit loss of $14,414.
If your high LTV customers don’t respond to discounts and promotions but your low LTV customers do, sending out promotions doesn’t get you extra profit you wouldn’t have otherwise had. In fact, it cuts into your profits even further. Providing discounts to people who do not benefit your company just compounds your losses.
Frequent discounts also attract customers motivated solely by price, diminishing the value you offer and making it impossible for you to compete on anything other than price. Additionally, regular discounts just train your customer base to wait for discounts, and soon they may not buy without a discount. That effectively lowers your prices for a large swathe of buyers.
Because lowering the price of a product by just 1% corresponds to an 8% reduction in profitability, providing discounts, especially to the types of customers that won’t turn you a profit, jeopardizes the profitability and longevity of your business.
Often, the most unprofitable customers can take up outsized customer service resources. Frequent engagement with customer service representatives, returns, dissatisfaction, and other kinds of complaints from low LTV customers exact a high price on productivity, capacity, and strategy.
Understanding the behaviors and attitudes of your customers is so crucial to keeping your business as a whole profitable — not only do you increase the number of high LTV profitable customers and learn to engage with them more impactfully, but you also decrease the number of low LTV unprofitable customers you acquire. This will effectively increase your profits, decrease your churn, and keep your business sustainable long term.
