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KPIs: New Customer vs. New Product

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sales vs marketingSALES vs. MARKETING Series. Posts comparing how these two disciplines approach a similar commercial topic.

 

 

    What is success in New Customer Acquisition and how it is measured is a distinctive and extensive area of focus. Read all about it here!

Marketing teams, especially now that our world is turning faster, often discuss how much effort to allocate on new products and what is a healthy level of new product introduction to keep the company ahead of competition.

Shouldn't the same happen in Sales, this time with New Customer Acquisition?
Shouldn't there be some clear criteria to measure the effectiveness of the efforts of the sales force in gaining new customers? What about the customers lost and how to measure that impact?

In Marketing the % of sales generated by new products over the last 3 years is the first indicator, the first KPI (Key Performance Indicator) companies examine.

One could use the same criterion in Sales. However, it is necessary that this KPI is measured lower in the sales pyramid and for shorter time.

If you consider every sales person as an operation center, you need to see how each one is doing, to be able to steer them individually. Also, do not forget that sales persons at the forefront concentrate on shorter term results. Instead of 3 years, one may need to consider 3 months, maximum 6, if the acquisition process is a complicated and lengthy one.

So the first KPI is New Customer Share of Sales, the % of sales generated by new customers over the last quarter (quadrimester or semester, if you choose so), per sales person. Formula: sales generated by new customers / total sales generated in the same period.
For sales executives, higher in the sales hierarchy, the % of sales generated by new customers over the last year is also important.

What about lost customers?
In every industry nowadays, more and more customers are attracted by the digital competitors. Classic competitors also “steal” your customers. So it is necessary to compare the customers lost with the customers won to see whether the balance is positive or negative.

Churn rate is the term used to indicate the % of customers that have not bought any product or services in a given time period. Formula: ( customers not having bought / total active customers at the beginning of the period = churn rate)
Counting the lost customers is an even more complicated task, requiring a clear definition of who should be considered as lost: a customer who has not bought for the last month, last quarter, last year? Which year: rolling or calendar?

With that in mind, the first KPI could be adjusted to track the % of sales the net balance of new and lost customers, in other words, of Net New Customers.
Most companies, however, in an effort to keep things simple, track the % of sales generated by new customers, comparing it with a historic % of sales of lost customers to track the balance of the development of their customer base. In times of digital disruption, past metrics may not apply. Check how volatile your industry is and decide.

Points of Sale vs. Values
Depending on the character of the business, counting the # of New Customers is also an important KPI because it provides a qualitative dimension of the prospecting effort. Consumer products companies in particular want their products to be accessible from more points therefore, what they call 'numerical distribution' is also important. They define clearly the optimal number of points of sale each sales person should service and consequently the number of new points are monitored closely.

See my article: New Customer vs. New Product

How do you measure New Customers?
Many small launches or a big one? Similarly for Sales, should it make a difference if one sales person with the same sales acquires 10 small customers and another only 3, obviously with more sales each?
The value of the first order is linked with the bigger issue of what is the order the new customer should place to be considered as new. Yes, all orders, even for 1 €, qualify in effect a customer. However, for a strategic concentration of efforts in opening significant customers, companies define a minimum sales level for a customer to be considered as new. Customers are considered new, as soon as they reach this threshold.

Tip: Find the optimal sales level to count a customer as new, balancing the effort needed with the minimum value of sales to establish a solid first business relationship. Not all first orders lead to more sales. If the initial order is too low, it could just be opportunistic sales.

Robustness of NCA process
In Marketing, the question on the number and the importance of projects in the pipeline are an indication of the sustainability of the innovation strength of the company. The estimated sales over a 3 years period after launch indicate how important the project is.

In Sales, however, instead of looking forward, the rate of historic success therefore looking at the past, at the conversion rate, is the Indicator to be followed. Each sales person has a list of prospects which should be contacted within a specific time frame. The Conversion rate, the % of success opening new accounts is another KPI to follow. Formula: (customers with placed orders / Total customer contacted = Conversion Rate). This KPI tracks both the strength of product or service offered as well as the abilities of the individual sales person.

Investment to acquire vs. success

In Marketing, the funds allocated to support Innovation are closely tracked, indicating how efficient is the NPD funnel in producing significant successes. This is known as Cost of Development.

In Sales the equivalent metrics is Customer Acquisition Cost (CAC), which monitors the absolute investment to be made to acquire a customer, as percent of lifelong customer value. It is clear that Customer Acquisition Cost is significantly higher than the cost of servicing existing customers. That is why it needs better monitoring!

This is not a pure Sales metrics because there are two elements in the cost:

a) the cost of direct marketing investment to attract the customer (especially in e-commerce that can be calculated, linking the cost of marketing campaigns to the revenue generated by the new customers) and

b) the cost of sales in closing the deal, when sales executives need to contact the customers to close the deal.

Marketing normally monitors their part. Sales needs to do the same: the cost of visits per sales person (# of visits to New Customers X average cost of visit (total cost of a sales person, including incentive, bonus, social contribution and training costs / # of visits per month)) as percent of lifelong customer value!

Tip: calculate the minimum sales required for a new customer to be qualified as new in relation to the Customer Acquisition Cost acquiring a new customer. If for example, in average you need to visit a customer five times in order to close the first order, the average cost of visits X 5 divided by the historic % of selling costs to sales, provides that minimum sales.

The calculation of the CAC can be a complicated one because the definition of lifelong customer value can be complicated. See the example of calculating Customer Acquisition Cost for Starbucks here

There are many more KPIs to be tracked, specific to each industry. For e-commerce companies, they involve Life Cycle KPIs ( ie. Renewal Rate or Winback Rate) or General Numbers & Rates KPIs (ie. Profit Contribution rate of new customers).

While the above KPI list is scratching the surface, these KPIs are critical to ensure that you are on the right track from a customer acquisition standpoint. Reviewing regularly and modifying your strategy is critical.

Where to start?

Define the 5 essential KPIs: New Customer Share of Sales, Churn rate, # of New Customers, Conversion rate, Customer Acquisition Cost and start monitoring them in your organization. Limit as much as possible the conversations of how to define them, keeping everything simple, and spend more time in dealing with the inefficiencies revealed when applying them.

 

 

 

Manolis Lekkas

A short Bio:

Senior Executive, expert in Consumer Goods / Cosmetics / FMCG /Creative industries, building and leading global organizations with entrepreneurial spirit and full P&L responsibility..

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