27 March 2012

LTVC > CCA: How much do your customers cost you?

I spent two very worthwhile days at the Recruiters Hub Conference in Sydney last week. Again, I was astonished at how few agency recruiters bothered to attend an event that was full of content specifically aimed at them. Those that did attend walked away with a significant competitive advantage, thanks to the generous sharing of information from all the speakers. 

I intend to write a summary of the Conference in a separate article but today I will focus on one gem I picked up from venture capitalist, Bill Bartee. Bill is clearly a very smart guy as he has been involved at the ground level of a number of very successful technology floats, including Seek. 

As a person who has witnessed many fledgling companies experience both success, and failure, Bill knows what makes the difference between a company that becomes a long term success compared to one that is more akin to a shooting star. 

Bill went through a list of recommendations he has for companies who want to make a big impact, and by association, grow profitably.  

One of those recommendations was Bill's formula LTVC>CCA. This means: 

Long Term Value of the Customer must be greater than the Cost of Customer Acquisition. 

At one level, this just sounds like common sense, but ... do you know the cost of your customer acquisition? I mean REALLY know the cost of doing business with each customer? 

If you are a recruitment agency owner, I would suggest you need to know this information so that you can make an objective decision about where your resources should be allocated in the pursuit of customers. In this context I consider both candidates and clients to be customers. 

The business model of recruitment agencies has traditionally been one of generating jobs and then generating placements. It's been completely revenue, or top line focused. In the lottery of contingent, multi-listed assignments where the odds have been strongly enough in favour of the high-activity recruiter, the costs of customer acquisition have been relatively low and not worth spending too much time measuring, understanding or worrying about. 

I believe that situation is very rapidly changing. As was highlighted in the data from the RIB Report, I wrote about two weeks ago - the average placement fee is declining and the average gross temp margin is also declining. This is in the face of the average annual remuneration per income producer rising 11%.  

You don't need an economics degree to work out that if this trend continues in the longer term, then there is a big agency profit squeeze coming sooner or later. 

If you are on top of your cost of customer acquisition, you are far more likely to be pro-active in dealing with this potential squeeze, rather than sitting back and then being shocked into action when your gross profit margin seems to be in some sort of death spiral. 

Here are some questions you might wish to ask yourself:
  • What is the cost of acquiring each qualified candidate (ie after interview)? This cost would include such things as expenditure on candidate advertising and promotion, amortization of your database, interview room cost, consultant screening and interview time cost, etc.
  • What is the cost of acquiring each qualified client? This cost would include such things as: expenditure on branding and promotion, amortization of your database, allocation of telephone costs, direct costs of client visits (eg petrol, train ticket etc), indirect costs of client visits (eg consultant time researching the client and travel time going to and from the visit), the cost of credit checks, etc.
  • What is the cost of each placement/filled job? This cost includes all the costs listed above in acquiring qualified candidates and clients, as well as the consultant's total time spent on both the filled assignments and also the unfilled assignments. 
In my experience, the companies that are all over this and both know and manage these costs very effectively, are those recruitment agencies who decline to take on contingent assignments or if they do take on contingent assignments they do so with a very clear understanding of the client's commitment and the other job-filling strategies their client has undertaken. 

Working on multi-listed, contingent recruitment assignments without any attempt to qualify these assignments is akin to Russian Roulette; the odds seem in your favour to start with but the longer you play the more likely it is that you will take a bullet. 

Mindset Operations Director, Aaron Dodd recently invoiced a client over $1000 after he arrived at his client's premises for an agreed meeting and the client was not in the office to make the meeting. And yes, the client did pay the invoice and still listed a very senior vacancy (retained) with Mindset. How about that for valuing your time? Although I am sure this is normal practice for lawyers and accountants. 

If every recruitment agency owner and manager clearly understood their cost of customer acquisition, I suspect the age-old practice of working on any old multi-listed, contingent assignment would start to very quickly decline in popularity as would managing recruitment consultants by numbers-only rather than by numbers and quality. 

The odds in the traditional contingent recruitment lottery are changing rapidly.

What are you doing about it? 

A very smart place to start would be knowing your cost of customer acquisition and then have your team understand very clearly where, and with whom, they should be investing their precious time.

1 comment:

  1. This was one of my favorite sessions of RHUB, Ross. Great summary and insightful post on applying Bill's recommendations even deeper into the recruiting marketplace. I'm so glad I was a part of this event!

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