Fall 2005: by Brent Banda

Attracting Profitable Customers

The first step to effectively marketing your business is to understand your current customer base by identifying the most profitable segments and by examining the lifetime value of each segment.

At this point, most small and medium companies immediately begin planning how to focus their time and marketing budget in order to attract more customers in their highly profitable segments.

Not All Customers Are Equal
Some customers are more valuable than others. Before you spend a dollar of your marketing budget or an hour of your sales time, consider which customers are driving your company's profitability.

Calculating customer value is simple. Segment your current customer base into groups based on characteristics that are relevant to the sale. Keep in mind that the same customer cannot be part of two different segments. There are many different ways to group customers, and how you choose to segment the market is entirely up to you (demographics, psychographics, geographic location, etc). The important thing to remember is that different segments should purchase products for different reasons.

A simple method of building business with existing customers is to ensure that they are aware of all that your company offers.

Next, calculate the lifetime value of each segment's average customer. Lifetime value is the total sales revenue for a customer over the life of the relationship minus the costs associated with the sale (cost of goods sold, sales commissions, etc). Essentially this is the profit per sale multiplied by the number of sales in a customer's lifetime. In a relationship business, you may want to include the value of referrals in your estimate. The lifetime value will be different for each segment of your market, because factors such as profit margin and frequency of purchase vary by segment.

How much is each market segment currently worth to you? Simply multiply the lifetime value of an average customer in each segment by the number of customers you are now serving in that segment. You can also calculate the potential value of each segment by multiplying the value of a segment's average customer by the number of customers you could potentially serve in that segment.

What have we learned? We have identified our profitable customer segments, and the actual and potential value of each. This can tell you whether you should grow your business in a segment or get out of that segment altogether. Remember, this is only one piece of information, so you must consider other issues such as level of competition.

Gaining a Greater Share of Your Customer's Wallet
At this point most small and medium companies begin planning how to attract new customers. Instead, look at growing your business with your existing profitable customers. Do your current customers spread their business around a few suppliers? Can you sell complementary products to these customers? Can you increase the frequency or quantity of your customers' purchases?

What you really want is a greater share of the purchases these people make. Most companies never consider pursuing additional revenues from their current customers. A simple method of building business with existing customers is to ensure that they are aware of all that your company offers. Many small and medium size businesses do not properly communicate this to their market. Awareness advertising is an education process, and the best way to portray a clear message is often by presenting a situation that your customer can relate with. A promotional campaign that showcases a product or a customer testimonial is often quite effective. You have an existing relationship with these people, so use it to your advantage.

Encouraging Referrals
Once you have increased sales to the people you currently serve, it is time to focus your energy on attracting new customers. Start by getting help from people who know you. Encourage referrals by leveraging your existing relationships.

Consider the following scenario: Someone asks you if you could refer an electrician. An old friend of yours is an electrician, but you know that his company is unreliable. Would you make the referral? Two things must happen for you to get referrals.

1. People must know what you do.
2. People must also trust that you'll do a good job.

Providing a referral puts your own reputation at risk. To encourage referrals, work to build your company's reputation with the people most likely to refer you to a potential customer. Depending on your industry, you might use tactics such as a mix of advertisements, promotional material and events.

Whether or not your company has a large marketing budget, all businesses must have a plan to get customers through the door. Make sure you take care of your customer base, as it may be your company's most valuable asset.

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