Have you ever heard someone boasting about their business and how much money they made in 2018? In their story, it sounds great, but what they often leave out is whether that was gross earnings or what they cleared after expenses. (Image Credit: Pixabay)
While not malicious in intent, it does point to a common mistake that a new business owner will make – not focusing on their profit margins. If you do not have a set limit for customer acquisition costs, you could spend more to get a client than they are worth. It is great to set goals for your business, but you must do so intelligently.
When you are in a competitive industry, it is not uncommon to have a high acquisition cost. In order to keep your business profitable, you need to have strategies in place to boost the lifetime value of your customers. There are limits to how much one customer will buy, so that is only half the battle.
In order to maximize the profit margin on your existing business, you also must look for ways to cut costs, without sacrificing the quality of your product or service. Below, we are going to share three proven tips for increasing customer lifetime value, while driving down fulfillment costs.
1. Be a Specialist, Not a Generalist
The smoother the fulfillment process is, the less time and resources it will generally require. On the other hand, if you offer many services, you will either need a large team or a small team of people with a large skill set.
While option two might not sound bad, the reality is, a simple, repeatable, and trainable process is generally more profitable because it is inherently more scalable. Look at franchises like McDonald’s, the key to their massive growth is their process, which is built to be easily trained and replicated.
In addition to the scalability, becoming recognized as a specialist in your industry is also great for brand positioning. Instead of fighting with low-cost rivals to offer the cheapest service, you can command premium pricing. If you can charge more for your service because of how your brand is perceived and couple that with a streamlined fulfillment process, your profit margins will grow. As you narrow your focus, you will find upsell opportunities that benefit your existing customers, while increasing the lifetime value.
2. Outsource Roles That Are Not Part of Your Core Offering
You should not outsource your core competency. If you are a logo design company, you need to have the skills to design logos, or your process and product will suffer. However, there are several areas where you can outsource some essential functions without impacting the quality of your work. Here are a couple commonly outsourced roles in startup companies:
- Outsource Call Centers
- Outsource Accounting
- Outsource Data Entry
In many cases, the combined cost of multiple services is less than the cost of hiring a single full-time employee. What’s more, other companies don’t call in sick! The areas you outsource may be different, but in general, if you can cut costs without hurting quality, it is an area worth exploring for outsourcing.
3. Minimize Your Overhead Expense Intelligently
When you are just getting started, you must spend your money in the areas that will generate the greatest return. Before you splurge on a giant office, a $100K company car, or a brand-new fleet of work trucks for your crew, you should be spending money on the two most important parts of any business – sales and marketing.
The fulfillment process and the resources needed vary greatly by industry. Even so, almost every fulfillment process has at least a few areas where costs can be cut, without impacting the quality of the service.
For example, let’s say you are in the construction industry and a fleet of work trucks is necessary for service fulfillment. You could purchase a fleet and buy a new truck every time you expand but is that the most profitable option?
If you were to instead rent your vehicle fleet and save a significant amount of money when compared with purchasing, would that detract from your service quality? Not likely! Take some time to explore your process and I bet you can find a similar savings opportunity.
There are businesses growing and thriving in every industry. If your business is struggling, work to implement the three steps above and 2019 could turn out to be a record year.