M05RunBusiness Foundations· Module 5
Customer Economics
Some customers cost more to win and serve than they will ever pay. Most businesses cannot say which.
- Grow
- Fix
- Customers
- Finance
- ~5 min · Calculation
The business problem
Businesses count customers and revenue but rarely the economics of each customer relationship: what it cost to win them, what it costs to serve them and how long they stay. Large customers can be the least profitable once discounts, credit and special handling are included.
Why it matters
Customer economics decide where to spend on marketing and sales, which customers deserve special terms, and how fast the business can afford to grow.
What you will learn
- Calculate cost to acquire a customer (CAC) by channel
- Estimate cost to serve, including credit, support and special handling
- Estimate customer lifetime value from margin, frequency and retention
- Compare lifetime value to acquisition cost by segment
Core questions
- What does it cost us to win a new customer in each channel?
- How long does a typical customer stay, and what do they contribute?
- Which customer types are profitable after cost to serve?
- Where are we paying too much to acquire or keep customers?
Work through the module
CaseWhat is happening?
Private outpatient clinic, 25 staff · Illustrative teaching case
A clinic signs contracts with several corporate schemes to increase patient numbers. Volume rises, but the schemes pay late, reject claims on administrative grounds and demand discounted rates. The clinic's front-desk and billing time per scheme patient is several times that of self-paying patients. Nobody has compared the economics of each patient group.
Full teaching case: The Big Customer
DecisionWhat does the leader need to decide?
Keep all schemes for volume, renegotiate terms, or exit the least profitable ones?
FrameworkHow should they think about the problem?
Lifetime value versus cost to acquire and serve
Lifetime value = average contribution per period × expected periods retained. Compare it with the cost to acquire and the cost to serve for each customer type. A healthy customer type returns several times what it costs to win and serve.
ToolWhat can they use?
Customer economics sheetCalculation
- Group customers into 3–5 types
- For each: acquisition cost, average contribution, frequency, retention
- Add cost to serve: credit days, admin time, special handling
- Calculate lifetime value − acquisition cost − cost to serve
ApplicationHow does it apply to their business?
Apply it to your own business:
- Group your customers into a few types
- Estimate each type's economics with the figures you have
- Identify the most and least profitable customer type
ImplementationWhat changes?
What should change in the business:
- Direct acquisition spend towards profitable customer types
- Set terms, credit and service levels by customer type
- Renegotiate or exit relationships that remain unprofitable
ReviewDid it work?
How to tell whether the change worked:
- Has the mix shifted towards profitable customer types?
- Has cost to serve fallen for the problem segment?
- Is acquisition spend now tracked by channel and result?
After this module you should be able to decide
Keep all schemes for volume, renegotiate terms, or exit the least profitable ones?
And leave with: Cost to acquire, cost to serve and lifetime value by customer type.
Sequence · Business Foundations