How to stop hating complaints. Step 1: Know your Numbers

Hey there,

Complaints are a worry at the best of times. More so if they happen while you're away.

I'm willing to bet that one reason you worry might be that you believe people only complain to get money out of you. We dealt with this last time. While I have no doubt that there are people who are simply looking to fleece you, most of the time, your clients complain because they want to help you improve.

The other reason you worry is probably that you think your team will give too much away in trying to make an unhappy client happy again.

The solution to both of these issues is actually the same:

Become intimately familiar with your business's net profit margins, then enable everyone in your team to use that information as part of a consistent process for handling complaints that gives positive results for both sides.

In this newsletter I'm going to address the first part of the solution:

• How to quickly calculate net profit per-product, per-sale.
• How to use this figure to calculate net profit per customer lifetime.
• Why you should then share this information with your team.

The aim of gathering this data is:

• To give you and your team an objective way to think about how 'valuable' a client is, that’s independent of the amount of noise they may make.
• To help you work out exactly how much you can afford to spend to turn an unhappy customer into an advocate. In other words, to give you a budget you can use to work out how best to compensate them.
• To give you baseline figures against which to measure progress. For example, if your new complaints process works well, you should find that customer lifetime values for each product/service goes up
• To give you a much clearer picture of where your profits come from, and therefore, where you should focus your efforts to improve those profits by reducing complaints

And last but not least:

• A reason to put your prices up

Of course, if you are already intimately familiar with this data, you can skip the rest of this newsletter. I'll walk you through how to use them when handling a complaint in later newsletters.

If not, make yourself a beverage of your choice, and read on. In fact make it a pot of your favourite beverage, I warn you, it's a long one!

How to easily calculate net profit per-product, per-sale.

If you're a sad old git like me, and you really want to get into the weeds of calculating the net profit of a particular product or service, I've written a long article with a worked through example of how to go about it here: "Bake the Profit In"​

But what if all you have to work with is the price of each product, and your business's total costs?

Well there is a way to get to an answer that's close enough to be meaningful.

You use the proportion of total business costs each product or service uses, together with it's price, number of sales to arrive at a net profit margin per product, per sale.

Let's start with a simple example:

Say you only sell one product.

That means 100% of the total costs of running your business can be attributed to that product. Or, to put it another way, that product contributes 100% to the total costs of running your business.

Now let's say you sell 100 of them over a year at a price of £10 each.

Now let's say that it costs you £700 to run your business for a year. That includes everything, including what you pay yourself.

The net profit margin on your product = Product price - ((total costs * product %) / number sold):

• = £10 -((£700 * 100%)/100
• = £10 -((£700/100)
• = £10 - £7
• = £3.

This is obvious. Of course, you could have just divided total costs by number sold, to get £7 cost, giving you a net profit margin of £3.

But it's when you have several products that cost you different amounts of time and effort to sell and deliver, AND YOU DON'T KNOW HOW THAT BREAKS DOWN IN DETAIL that this approach comes into it's own.

First, work out the percentage contribution of each product/service to the year’s costs. These are likely to be different for different products. Once you have those percentages, here's how you use them:

For example, let's assume costs are the same as before, but you sell 3 products:

Product 1 takes up 30% of the total cost of running your business, and you sell 25 of them at a price of £10.

Product 2 takes up 50% of the total cost of running your business, and you sell 25 of them at a price of £10.

Product 3 takes up 20% of the total cost of running your business, and you sell 50 of them at a price of £25.

As before, each product/service net profit margin = Product price - ((total costs * product %)/no of product sold)

If your total costs are £700.

• Product 1 net margin = £10 -((£700 * 30%)/25 = £10 - (£210/25) = £10 - £8.40 = £1.60
• Product 2 net margin = £10 -((£700 * 50%)/25 = £25 - (£350/25) = £10 - £14 = -£4
• Product 3 net margin = £25 -((£700 * 20%)/50 = £25 - (£140/50) = £25 - £2.80 = £22.20

What you see is that Product 1 is OK, Product 2 actually makes a loss, and Product 3 is highly profitable.

"But Kirsten", you ask, "how do I work out how much of the total cost of running my business is down to a particular product or service?"

Well, you have 2 options.

Option 1: Use your gut feel. It's more accurate than you might think. Especially if you've been running your business for a while.

Option 2: Sample. Give your team a simple timesheet to fill in every day for a week. All they need to log is how much time they spend on each product every day. If you don't think a week is long enough, extend the time to a month. As I hope you've come to expect, I've put together a simple Team Product Timesheet for you to use as your own starting point.

If your business is seasonal, use your gut feel to adjust the weightings over the year.

Already you've got some useful data you can use when dealing with a complaint.

The net profit margin per product tells you how much leeway you have to compensate a customer if their purchase of that product goes wrong:

• For Product 1, you don't have much to play with.
• For Product 2, you're already losing money, compensating anything will only lose you more.
• And for Product 3, you've got the luxury of £22.20 to play with.

Now it's your turn:

What are the total costs of running your business over a year? Remember to include the cost of remunerating you, especially if you pay yourself through dividends:

• £

For each product/service you sell, get together:

• the price:
• the number of sales you make of this product/service in a year:
• the percentage contribution this product/service makes to your total costs:

Use these figures to calculate the net profit margin per product/service per sale.

Of course, I've created a spreadsheet template for you to use. I've built this Net Profit Margins Calculators Template to include everything covered in this newsletter.

Make a copy and download it from here: https://docs.google.com/spreadsheets/d/1J63SMnXmUT6yf37MrofMEYcfd_scJ9b-2w0P8hDNVJ0/edit?usp=sharing​

How to use this figure to calculate net profit per customer lifetime.

Now you've got your per-product per-sale data, you can use it to calculate an even more important net profit figure - net profit per customer lifetime. That is, the amount of net profit an average customer brings you while they are your customer.

Perhaps a customer only buys one thing from you, and only once.

In that case the per-product net margin is all you have to work with, when handling a complaint. And that may well be enough.

But what if customers buy multiple things?

For example, what if your average customer buys Product 1 first, then Product 3? You make a small net profit on the first sale, but a very decent one on the second.

If that customer was to complain, or you knew you had made some sort of mistake, you now have a total budget of £23.80 to play with. There's a very good chance you won't need to spend all of it either.

Or, what if a customer buys Product 2 first, then Product 3? You'll have made a loss on the first sale, but a decent profit on the second, meaning the net profit margin per customer lifetime is actually £22.20 - £4 = £16.20.

Still decent, and a decent amount of leeway if something goes wrong. If product 2 is a 'loss leader' that helps customer to go on to buy Product 3, this strategy is still profitable.

And what if your customers buy the same thing repeatedly?

This is where the numbers really start to stack up (the wrong way in the case of Product 2!).

Here's a real example from one of my clients, a dog-walking business:

At first sight an individual dog walk is low-value (£12), but:

The net profit per dog walk = £5

Each client buys a minimum of 3 walks per week.

This gives a net profit per client of £15 per week, 50 weeks a year, adding up to £750 per year.

Most of their clients stay on average 10 years. So the net profit per client over their lifetime is actually £750 x 10 = £7,500.

So actually that means this business owner can afford to spend up to £7,500 per client to make them happy again after a mistake has been made.

Your turn:

How do you measure customer lifetime?

Unit: Day/Week/Month/Year?:

What's the average no of Units a customer stays with you?:

How many times do they buy per Unit?:

Average net profit per customer lifetime:

• = (No of times they buy * no. of Units they stay * per-product net profit)
• = £

Use the same Net Profit Margins Calculators Template to capture your figures.

But actually, there’s even more to this:

Delighted, happy clients, refer you to others in the same situation.

Most of this dog-walker's clients recommend the service to others - friends, family, new dog owners, other dog-walkers they meet.

On average over their lifetime, each client refers 2 other people who then become clients.

So for this dog-walking business, the true net profit per customer lifetime is closer to 3 times the direct value of each customer:

= net profit per customer lifetime + (net profit per customer lifetime * average number of successful referrals)

= £7,500 + (£7,500 * 2) = £7,500 + £15,000 = £22,500

or if you like it even simpler:

= (average number of successful referrals+1)*net profit per customer lifetime

= 3 * £7,500 = £22,500

Whichever way you work it out, this figure makes it well worth investing in turning a problem into an opportunity to delight.

Your Turn:

Take the average net profit per customer lifetime you've already calculated:

• £

On average, how many new clients does a customer refer to you over their lifetime?

• Number of successful referrals:

Your true customer lifetime net profit:

• = average net profit per customer lifetime + (average net profit per customer lifetime * average number of successful referrals)
• = £

OR

• = (average number of successful referrals+1)*net profit per customer lifetime
• = £

You can do this calculation inside your copy of the Net Profit Margins Calculators Template.

Why you should then share this information with your team.

Because if they don't know what you know, they can't do as you would do.

I've mentioned before that my other half used to work in the import/export business, getting people's stuff to and from exhibitions all around the world.

One of the things that struck me as a brilliant idea, was that as a matter of course, he kept a running profit and loss sheet for each client, totting up costs against the agreed price with the client.

He didn't always make a profit.

Sometimes, a client would insist on a discount that meant he broke even on them, or made a small loss. So the next time he'd quote a higher price, so they could have their discount and he could have some profit.

Sometimes, he'd do a favour for a regular client and incur an extra unexpected cost, maybe making a small loss on one exhibition, in the knowledge that they'd be back for a bigger one later.

The business he worked for was German in origin, which is I suspect why they empowered their team in this way. I've certainly never come across it anywhere else.

The point is that knowing the big picture for each client helped him make decisions that were to the benefit of both parties.

If everyone in your team is as familiar as you are with where profit comes from for your business, then they can make sensible decisions about customer complaints, without having to come to you first. Especially if you support them with a process to give them context. And maybe even a running P&L sheet for each client they take care of.

And if for some reason it doesn't work, you'll have evidence and numbers you can use to find out why.

That’s it for this newsletter.

Next time we'll look at how you can use these figures plus what you know can go wrong with your products and services to build a simple compensation calculator your team can use to guide their decisions when a customer complains.

Here’s what you learned today:

• Working out accurate net profit margins at a per-product/service level can seem time-consuming and daunting. But there is a simple way to do this, if you know your prices, your total costs and the proportion of time that goes into each product.
• At least some of your customers are more valuable to your business than you probably think. And that value isn't necessarily related to how much noise they make.
• Once you get a handle on these figures, you, and your team can be empowered to make decisions around complaints that will not only delight your clients, they'll improve your bottom line too.

Meanwhile, pick your best-selling product or service, and see how these numbers stack up. You might be pleasantly surprised. Here's the Net Profit Margins Calculators Template again.

As always, Thanks for reading.

And again as always, reply, or book a quick chat if you have questions, or I've made a mistake, or you just want to share how this went for you.

Take care,

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