Activity-Based Costing 137we discussed last meeting, on one hand, you could keep an individual log on each
customer to identify the cost to sell them, but this would be time-consuming and
few people take the time to accurately enter this information. On the other
hand, you could aggregate the cost and average it over the 10 customers sold. But
it seems that this is also not appropriate. A reasonable midpoint is to identify a
separate driver defined as your best-case and worst-case customer and see if this
gives you the required amount of detail. Why don’t you do that for next time and
also develop a summary of the total cost to capture a customer.THE THIRD MEETING
Denise watched as the group approached the room. They were arguing some-
thing in a manner that indicated they were enjoying themselves. This was a
good sign.
Dave began:
It’s amazing to us as an organization how much we didn’t know we knew about
our business. When we relayed your first assignment for this meeting to those
that work with potential customers, they immediately began identifying charac-
teristics that made some more expensive to sell than others. Large ones expect
to meet our management team before signing a contract, whereas smaller ones
do not. Flying one of us to these customers is expensive given our larger salaries
and what it takes to backfill in our absence. Also, customers who do not really
understand e-commerce and the complexity of transaction processing require
on average twice as many trips as those who do. They want us to demonstrate
what is wrong with their systems and to see how ours works better. Since we are
not familiar with their systems, this takes a while. For the selling process, the
best-case customer is a midsized company familiar with e-commerce and the
headaches caused by transaction processing. We can sell them on the first trip.
Unfortunately, of the 10 we signed to a contract in our sample, only 3 were of
this type. The other 7 were worst-case customers—larger with less knowledge
of the intr icacies of e-commerce. In summar y, when we trace the $410,000
using these driver definitions we estimate that the best-case customers cost
about $18,300 each and the worst-case about $50,700 ($18,300× 3 +$50,700×
7 ≈$410,000). What amazed us is that, once we asked these questions, our peo-
ple had a number of good suggestions on how to reengineer this process. They
knew these worst-case people were a problem, but never saw how much more
they cost. Transparency does help.
The answer to your second assignment, to calculate the total cost to cap-
ture a customer, is also amazing. This customer captureprocess is like a funnel.
Last time we said that the activity cost per lead of $730 was reasonable, as was
the $175 for each research report. But when you recognize that the process
ended with only 10 signed contracts, you get a different picture. The overall
process cost us a total of $1.495 million ($875 for identification, $210 for quali-
fication, and $410 for selling) or about $150,000 per signed contract ($1.495/10,
rounded)—quite a bit less for best case and a bit more for worst case. Some of
these costs are variable, some fixed, and some step fixed, but all of them can be