Customer churn may seem like a natural part of business. Here’s why it actually costs a fortune.

 

Hard Costs

CAC (Customer Acquisition Cost)

Acquiring a customer costs money. Most small businesses underestimate this cost and how it drains their profits.

Suppose you spent $250,000 on sales and marketing and won 800 new customers. Your CAC is $312.50.

If your commission on a new customer’s annual premium is $150, it takes 2+ years just to break even.

 

Inflated CAC (Replacement Cost)

One thing that never gets discussed is the increase in CAC over time.

After all, premium is essentially indexed for inflation, right? Ten years from now, customers will be paying more premium for the same coverage.

But your CAC will also have gone up.

Replacing customers in the future costs more than acquiring them now.

A customer you acquire at today’s CAC will actually be worth more in inflation-adjusted dollars in ten years than a customer you acquire in ten years.

 

Soft Costs

Lost Potential Income

If we again assume CAC of $312.50, and annual commission of $150:

• You’d break even in just over 2 years.
• After year 3 you’d be looking at a return of $137.50, or 44%.
• After year 5? $437.50, or 140%.
• Year 10: $1,187.50 (380%).
• Year 20: $2687.50 (860%).

Twenty years with that customer is worth 8.6 of the customer you keep for 3 years.

But in reality, a typical customer that you keep for 20 years would have bought more products. If their annual premium averages out to $400 over the 20 years, you’d be looking at this:

• Income: $7,687.50.
• ROI: 2,460%.

Losing the customer after 3 years involves an opportunity cost of over $7,500.

 

Brand Impact

The dollars are only the manifestation of the cost of losing customers. Another cost is the toll it takes on your brand.

You can be known for competing on price or value. If you’re competing on price, you’re interchangeable with other agencies. That’s a self-sustaining downward spiral.

If you compete on value, you develop a reputation for being “worth it.” It means customers who can afford to work with someone they know, like, and trust will want to work with you. And they’ll refer the people the know and love to you. That brand transformation will make you a fortune over the life of your business.

High customer churn doesn’t lead to that kind of differentiation.

 

Lost Compounding Effect

But the most expensive impact of losing customers is decelerated growth.

A business can have linear growth or non-linear growth. Linear growth comes from working a little harder each year and benefiting from favorable market conditions over time.

Non-linear growth (an upward curve) happens as, with each passing year, you build on the growth of the previous year. It’s just like compound interest: the better it gets, the better it gets.

And you know better than anyone that the combination of incremental improvement (interest) and enough years (time) means a fortune.