Do you know the true cost of a sale?

Neil Tanner

Bringing in new customers is essential to the long-term future of your business but do you know how much it costs to bring in each sale? We offer some advice about how to calculate these costs and how to minimize them to increase your profitability.

Calculating the cost of a sale
It's estimated that it costs an average of seven times more to bring in a new customer than to keep an existing one. But what are the components of that cost?

There are a number of elements that make up the cost of the sale. These can be broken down into:

1.   Direct costs

For advertising sales, these are made up of the following elements:

• Basic salary for your account executive
• Additional commission costs
• Car/mileage allowance
• Health insurance
• Pension
• Cost of tax and National Insurance

2.   Expenses and overheads

Each member of staff will also carry a potion of your overheads too. This includes:

• Management overheads
• Finance, admin and HR
• Property expenses
• Office/IT expenses
• Communications
• Training and recruitment
• Advertising and promotion
• Legal and accounting fees

So, to calculate your cost of sale:

1. Work out the cost for each account executive
2. Calculate the portion of overheads that they carry
3. Add these two together
4. Divide this figure by their revenue target for new customers and x100
5. This will give you the cost of sale for new business as a percentage

You may be surprised by the figure you reach. It's easy to overlook these costs as they are part of your day-to-day running costs, but there are ways to reduce them.

Ways to reduce your cost of sales

Go for the big boys
The Pareto principle states that roughly 80 percent of the effects come from 20 percent of the causes. This is true of customers where, for many businesses, 80 percent of the revenue comes from 20 percent of your customers.

By targeting these types of customers, you'll obviously reap the rewards for your business and the sales often don't take any longer to close. That means the costs are the same but they offer more value to your organization.

Find the right fit
If you can identify the right prospects, you'll be knocking at an open door. Of course, that's harder than it looks. Review your existing customers and see if you can identify any patterns, not just in their segment and spend, but also in their behavior. Then look for prospects that are similar.

Finding the right fit for your customers means they're more likely to stay with you too, increasing their value in the long-term.

Outsource some or all of your customer acquisition
By outsourcing your sales, you minimize the risks to your business and often reduce the costs too. You only pay when you have guaranteed new business, so there are no costs until the sale is closed.

You also won't need to pay for many of the fixed expenses in your cost of sale, so your acquisition costs are likely to be much lower than having an in-house sales team. Alternatively, the right partner can help increase your capacity and support your in-house team by sharing specialist knowledge.

The right partner will also ensure that they are targeting the customers who will be a good fit and bring in more business.

Neil Tanner has been leading innovation and delivering business value for small- and medium-sized businesses for more than 20 years. Tanner comes from an entrepreneurial background and also was the business leader for small- and medium-sized businesses at Microsoft Ireland and Microsoft Canada. His acquisition of NRS Media is the first step in building a global brand that is seen as the trusted adviser for small businesses around the world.  Tanner can be reached at neil.tanner@nrsmedia.com