Customer Acquisition Cost. Measure It Then Reduce It.

December 18, 2019 | By: Energy Engine
Categories: Blog Posts

Gains and losses.  The lifeblood and barometer for every fuel business.  Embedded within the simple pluses and minuses is a treasure trove of critical information that speaks directly to the health of your business.  Are you growing?  Contracting?  Is your brand strong?  Are your prices optimal?  Is your marketing strategy working?  Does your team effectively manage retention?  Do your customers view their experience positively?

There is no other metric that can tell you so much about how you’re doing as an organization.  And no other metric that creates so much excitement or outright anxiety.  It really is an obsession for good reason.  But there are some things to consider.

Dealers may not be focused on the big picture of gains and losses.

All customers are not created equal although a standard gain and loss analysis can make it seem that way.  Too often, dealers only see numbers, not what is behind them.  Losing a customer who burns 1000 gallons a year and gaining one that burns 700 is not an equal trade-off.  It is a good habit to start tracking the net gallons alongside gains and losses.

And then there is the all-important issue of margin.  Swapping a high margin customer for a low margin customer, even if that incentive is temporary, is a financial hit to your business.  Always be sure to account for the margin dollars of lost customers and new customers.  The industry is experiencing an increasing amount of customer transiency which, translated, means dealers are simply stealing customers from each other.  This is turning out to be a margin enemy.

The theft is usually done through discounting and free services which only serves to further erode aggregate margins, sometimes across an entire market.  The rationale is that, over time, these recently acquired customers will be normalized on price and the margin woes will disappear.  Absolutely not true.

First, customers are savvier than ever.  If they came in cheap, they will demand to stay cheap…or they will leave.  Secondly, recent research shows that nearly 50% of new Full Service customers will leave you within 18 months.  That is a sobering statistic that reflects a new generation of fuel consumers asserting their will.  More than anything, it does not give you enough time to recoup lost margin dollars.

Growth and profitable growth are not the same things.

The bottom line to this deeper dive into gain-loss is that you should be diligent about how you define growth.  More gains than losses is not necessarily proof that you are growing.  It might just be proof that you have mastered the art of stealing customers from competitors!  Not a bad thing at all but look further.  Ultimately, the profitability of growth is more impactful than overall customer count.  Most dealers are surprised when they delve into the details of gain-loss.  And very often, excitement turns into anxiety as they realize that things are not as they appear.  Where are the profits?

Odd as it might seem, growth can actually be costing you money.  It is far more prevalent in the industry than dealers believe.  It is a case of confirmation bias, with dealers wrongly believing that all growth is good.  Then, unfortunately, not accounting for the COST of gaining customers.  Or better yet, how to reduce that cost.

Customer Acquisition Cost.  You need to be familiar with this starting yesterday.

Many industries have a finely tuned approach for measuring Customer Acquisition Cost.  In the fuel industry, this is, at best, back-of-envelope math.  Everyone seems to throw out different numbers for the cost of acquiring a Full-Service customer.  $300…$500…even $700 per gain!  It is safe to say by looking at industry data that the number is somewhere around $500 all-in.  Marketing, sales, incentives, CSR enrollment calls, etc.

Ponder that for a minute.  If the average heating oil user is 850 gallons per year and we use a net margin of 40 cents (assuming a gross of 95 cents), then that is $340 per year in bottom-line money.  So, it will take almost 2 full seasons to break even on the cost of acquiring that customer.  And, as stated, half of them will leave in 18 months.

The lesson is simple.  Be laser-focused on your CAC.  Assess your average annual usage and cost of gains…and identify the break-even point.  Then manage all the feeder items such as marketing spend, incentives, and price discounts.

The key to driving down Customer Acquisition Cost. 

Ecommerce.  It’s a word we hear every day and a shopping method we have all embraced.  It is not a stretch to say ecommerce has changed the way we live.  And now it has arrived at our doorstep of the fuel industry.  Customers are demanding a sophisticated online experience, the ability to self-serve, and the ability to build a relationship with you that does not involve talking on the phone.  Traditional web sites are increasingly less visited.  Shopping carts for fuel ordering only annoy customers who are accustomed to much more.

But the best thing about ecommerce for fuel is a massive reduction in Customer Acquisition Cost.  Leveraging the power of the web for marketing and customer engagement cuts the cost of acquiring a new customer by up to 85%!  That is not a typo.  Instead of $500 per gain, ecommerce can deliver them for around $65.  And all that savings flows right to your bottom line.

Some real numbers to hammer home the point.  

At The Energy Engine, we constantly monitor the performance of our dealer clients to ensure their success with online fuel ordering.  And while this is really meant to provide valuable guidance to our customers, we have become known for having some of the best “digital customer” data in the industry.  How they find dealers, learn about dealers, and ultimately convert into loyal customers.

Our network of independent dealers uses The Engine system to serve hundreds of thousands of customers across the entire northeast.  Our level of visibility into the market is unique in that it centers around online fuel customers.

Here are some compelling stats from 2019:

  • The average Customer Acquisition Cost was $67 per gain (as low as $48 per gain in some markets)
  • The average marketing spend in-season was $4500 per month (including PPC and marketing advisory services)
  • Marketing spend averaged 4% of online fuel sales (about one third the cost of traditional Full-Service marketing)
  • Dealers with the lowest Customer Acquisition Cost have a 12-month marketing strategy (not just seasonal)

 

The Energy Engine.  Lower Customer Acquisition Costs, profitable growth, and a world-class online experience.