What’s the #1 factor that stops most marketers from having a greater impact on their company? What stops them from seriously influencing company profitability? A decade in sales and marketing has shown me one most common limiting factor. I see it everywhere!
When you understand the principle on the other side of this limiting factor, you experience immediate benefits. No matter what industry you’re in. The benefits include:
- You have more influence with your financial director and CEO. They’ll give you a much bigger sales and promotions budget (if you are the CEO, you’ll have greater influence with your board, and greater control).
- You have a far greater impact on company profitability.
- You enrich the lives and/or businesses of more customers.
- You have more fun. It’s no secret that when you create value for more customers, you create more value for your organisation. This, in turn, creates opportunities for your employees and suppliers. Forget the old ‘win—win’ as opposed to ‘win—lose’ model. This is a ‘win, win, win, win!’ Several stakeholders benefit.
“So what’s the limiting factor?”Senior marketing and sales executives (not to mention the far majority of promotional agencies and suppliers) fail to determine what their customers — on average — are worth to them in NET PROFIT. That’s determined over the customer’s forecast lifetime.
Because of this, marketers don’t know how much they can afford to INVEST to create a customer.
Now depending on your background, this might sound pretty basic. Or it could appear complicated.
Like a lot of things, it’s simple, when you know how. But less than 1% of marketing and sales executives actively work the principle.
I’ve seen businesses transformed when this principle has been adopted. This includes our own. And it also includes the transformation of clients businesses that were already very successful.
Let me demonstrate how this transformation can take place within a simple and small business that we all understand. Take a hot—dog stand in the CBD of Sydney...
Bill runs a hotdog stand on the corner of Market and George Street.
It’s a reasonable business. Bill has some regular customers, some passing traffic and the occasional tourist. One of the things that makes his business unique (for the hot dog stand industry, that is!) is that he runs a database. Well ok, that might be a little unrealistic, but hey he needs to have a database for our analogy (or extensive market research)!
And a customer database is something that you and I have. Bill wants to grow his business but he’s not really sure how. He does know through some good research (and we’ll trust it in order to demonstrate) that he needs to acquire more customers.
He’s approached a few friends in marketing and sales. They work as managers in larger companies and were asked for their advice on how best to promote to get new customers. Bill’s not sure how much to invest and wants some general direction. He wants to know how.
The following varied responses come back to Bill:
- “Invest a percentage of sales, say 5—10%, and get a good mix of media. Don’t put all your eggs in the one basket!”
- “Your industry doesn’t traditionally invest in promotion for the following reasons...I suggest you invest your money elsewhere.”
- “Seeing that your most regular customers are in the office building next door, do a coupon mailing in that building and track how many new customers you acquire. Do a promotional test. If it works ok, you might do something similar in other buildings. Just invest enough to do a test in the first building. See how you go.”
- “All good businesses have developed a solid brand. Take Harry Café De wheels. It’s a renowned destination. Invest in developing your brand. Possibly give PR a whirl and be patient. It doesn’t happen overnight. Invest as much as you can realistically afford and tie it in with your strategic plan.”
So, let me ask you something. Who do you think is offering Bill the correct advice?
In my opinion, every one of these four comments is way off track!
Bills friends have missed the point altogether. Even if they were to work collectively around the clock on his business they would be severely limited by their thinking.
Why?
The first thing Bill needs to determine is what his customers are worth to him. That way we can work out how much he can afford to invest. Given that certain types of customers are worth more, we decide to segment his customer base into three categories:
Segment #1 Regular customers who work nearby - 527 total active (visited in the last 4 months) customers
- Total revenue spent by these customers at Bills in the past two years: $196,000
- Average customer worth in revenue ($196,000/ 527) over two years = $371
Segment #2 Infrequent customers who work nearby - 427 active (visited in the last 4 months) customers
- Total revenue spent by these customers at Bills in the past two years: $35,654
- Average customer worth in revenue ($35,654/ 427) over two years = $83
Segment #3 Tourists (mostly English backpackers) - 503 active (visited in the last 4 months) customers
- Total revenue spent by these customers at Bill’s in the past two years: $5,543
- Average customer worth in revenue ($5,534/503) over two years = $11
Now let’s say, for argument sake, that Bill’s gross profit margin is approximately 10% — across the board, for all sales. For those of us with a finance bent, this might sound like an over simplification, but hey, where are we going to fit a fifty—column spreadsheet around here?
So what does Bill’s margin tell us about these three customer segments?
It tells us that an:
- Average regular customer is worth $37.00 in profit, over a two—year period.
- Average infrequent customer is worth $8.03 in profit, over a two—year period.
- Average tourist customer is worth $1.01 in profit over a two—year period.
The next question becomes, what can Bill afford to invest in creating these customers?
The answer is relatively easy. Bill has reason to believe (with an acceptable risk level) that these customer segments will continue to behave this way — over the next two years. Bill considers that his next best available investment option (outside of his own business) is mutual funds. He forecasts a 15% return p.a. with these fund investments. So Bill decides that an investment in his business, by comparison, would need to return 25% p.a. to make it worthwhile. After all, there is a fair bit of risk and work involved.
So we can determine that Bill can afford (at the most) to invest:
- $4.62 ($37/ 2 multiplied by 25%) to create an average regular customer.
- $1.00 ($8.03/ 2 multiplied by 25%) to create an average infrequent customer.
- $0.12c (1.01/ 2 multiplied by 25%) to create an average tourist customer.
These figures are what we call a maximum allowable cost.
So on the condition of a few factors, Bill should have unlimited promotional budget!
The conditional factors include:
- Bill being able to scale his fulfillment (create a bigger stand, can order more rolls etc).
- Bill having cash available.
- Bill finds a scalable and measurable way to promote and create customers within his allowable cost. That could be PR or email marketing, or some fancy combination — who knows!
Given that his allowable cost is so much bigger for regular customers, the chances are its going to be a lot easier for him to create more of these with targeted promotion. But he can test different measurable approaches.
The point is that if Bill can do these things, guess what? He’s going to serve more customers profitably. He’ll make his investors wealthy. Like we said Win, Win, Win, Win.
And what about his marketing buddies in larger companies that all sounded so convincing?
Well as the CEO of Xerox, once remarked “Marketing is too important for the marketing people”.
The chances are, they all have tremendous expertise in specific areas, but that doesn’t necessarily make them experts in designing and implementing a measurable promotional/sales system. Or ensure they know how to formulate optimal metrics for customer acquisition.