When figuring out your profit margin, you likely look at your different operating expenses: supplies, licensing, taxes, insurance, etc, etc.
But, are you factoring in customer reparation costs?
Customer reparation cost is the amount needed to make an unhappy customer happy again in order to protect your online reputation, so that a potentially negative review, post, tweet, etc doesn’t reduce the amount of income your business generates.
As a reputation attack can come in many shapes and forms, it’s not practical to assign a customer reparation cost to each product you sell or service you provide. Instead, you should simply set aside a certain percentage of your total income as an emergency fund for customer reparation costs.
Why is this important?
Here’s an example of an unhappy customer hurting your profits:
A customer is unhappy that the shirt they ordered was very wrinkled and they had to get it pressed. They ask you to reimburse $8 to cover the cost & time involved.
Your refuse, because, well, it’s just some wrinkles. $8 is way too much! The shirt only cost them $25, you cannot afford to refund $8!
The customer then writes a negative review, posts a negative blog post, tweets about their experience, and tells their friends to avoid buying from you.
You have not only lost the lifetime value of that one customer, but potentially have lost the lifetime value of other customers that Googled you, checked Amazon reviews, or saw the tweet. (Also known as the lifetime cost of a detractor.)
It’s a $25 shirt, with, let’s say $10 in profit. An average customer buys 3 shirts from you, over their customer lifetime value.
You drop from 100 new customers a month to 90 new customers a month, due to the attack on your reputation.
Quick math: $10 (profit) x 10 (customers lost) x 3 (average per customer) = $300 per month, lost in lifetime customer profit.
$300 per month in lost profit, because you dug your heels in and refused an $8 refund–or even a credit on their next purchase.
Whether you decide to set aside a reparation emergency fund each month, or simply accept that 1-2 times (or more) a month you will have to take a small hit to the profit from a single customer order, is up to you.
Just keep in mind that the amount of potential lost profit is often huge compared to the small expense of making an unhappy customer happy again. And let’s not forget the immense cost of hiring a firm such as Reputation Refinery to rebuild your damaged reputation.
That’s a LOT more than $8!