Acquiring, Retaining and Growing Customers

Anyone who speaks to me about marketing will know my pet peeves.  Chief amongst them is organisations who conflate the term marketing with sales.  You often see the term ‘marketing representative’ used instead of salesman.  House builders have marketing suites on their developments, not sales offices.  But sales is not marketing.

I also see plenty of businesses who have a ‘Sales and Marketing’ department.  I hate this description it smacks of a silo mentality and that a firms marketing activities are subservient to its sales team.  It also usually means that to the organisation’s senior managers, marketing is predominantly a promotional activity.  But promotion is only one element of the marketing mix.

In my view, these definitions of marketing are wholly incorrect.  Properly defined, marketing is a critical strategic activity that should sit closely to an organisation’s senior management; not a distant silo subservient to the organisation’s sales team.

That said, sales and marketing are linked activities.  There is no point in a corporation developing a customer focused strategy, if it isn’t enacted by its sales representatives.

Marketing guru, Peter Drucker once said, “the only profit centre is the customer”.

For too long, the focus of sales teams was therefore growing the customer base.  More customers meant more profit and greater market share.

However, in today’s highly competitive markets, the focus has moved.  Bob Weyland said:

“The paradigm has shifted.  Products come and go.  The unit of value is the customer relationship”.

So today, particularly in B2B markets, the focus is about growing and deepening the relationship with your existing customers.

Studies have shown that the cost of obtaining a new customer is five times that of keeping existing customers happy.  The longer you keep a customer, the more you can earn from them.  It can take many years for a new customer to buy at the same level as existing customers.

The focus on existing customers means not taking them for granted.  Every so often you have to do something special for them.  You need to encourage their feedback and react to that feedback.

However, there will always be a process of erosion.  Whatever you do you will lose customers.  For example, the fashion retailer Top Shop targets consumers under the age of 30.  So what happens when that target market ages?  How many sixty year olds will buy clothes from Top Shop?  Like products, customers will have a lifespan.

So as well as retaining existing customers, you will always need to obtain new customers.  And of course you have to turn new prospects into repeat buyers.

In today’s markets, customers have extensive choice.  There is an abundance of suppliers and brands.  So you have to do more than locate prospects.  In addition to locating prospects, you need to sell to them and you need to turn them into repeat buyers.

Generating customer leads is a three-step process.

Firstly you need to define the target market.  That means a structured process of segmentation, targeting and positioning.

My brother runs a small landscape gardening business.  I asked him who his target customers were.  His reply: “Everyone and anyone”.  This is clearly an unrealistic approach. For a start, his business doesn’t have the resources, financial or otherwise, to promote his services to all.  He needed to identify customer groups which were worth obtaining; customer groups which would offer the best returns and who were the best match for his skills.

The targeting and positioning process means that you need to deepen your knowledge of the target market;  you need to know what it wants; what it buys; where it buys; when it buys and HOW it buys.

Secondly, you need to solicit leads through communication tools, the promotion bit of the marketing mix.  Traditionally, this has meant advertising, personal selling, direct mail and events such as trade shows.  Today it may also mean product registrations, event sponsorship, using celebrity advocates.

Remember the internet and social media is a promotional channel, like television or radio when it comes to soliciting leads.

Thirdly, you need to qualify the leads you gather.  Not all leads are worthwhile.  For example, there is little purpose in my brother collecting leads five hundred miles from his base as the cost of travelling to do the job will erode any profit margin.

Some prospects may express an interest in purchasing your goods but will have no intention of actually doing so.  They may lack the means.  I would love to own a vintage Fender guitar, but the cost, and my level of ability on the guitar make that prospect a dream rather than a reality.  Ferrari recently produced a high-end sports car model where to be able to buy the car, you had to prove that you had the ability and expertise to buy it.  You never got to keep the car at your home.  It was kept by Ferrari who would ensure it was safe for you to drive.  Clearly, many motor racing fans would love to drive that Ferrari but would lack the expertise needed to drive it.

It really matters that you identify the BEST leads.  You need to distinguish between hot, warm and cool leads.  Hot prospects are those most able and willing to buy; those most able to buy.

Hot leads need to be prioritised.  It is not worth wasting the time and resources selling to those only partially interested in buying.

A useful selling technique is to use SPIN questions:

  1.  Situation Questions – e.g. how many employees do you have?
  2. Problem Questions  – what problems and difficulties is the customer experiencing? What are they dissatisfied with?
  3. Implication Questions – How do the problems affect the customer?
  4. Need pay-off Questions – What is the value or usefulness of your proposed solutions? e.g. What if I told you that I could reduce the cost of the implication by 80%?

You aren’t selling products or services but solutions and capabilities.

So how do you calculate if a customer is worth getting?  One method is to analyse the customer acquisition cost against prospective customer lifetime profit.

For example:

  1.  Cost of sales representative = £100,000 per annum (this is the total cost not just their salary)
  2. Average number of calls per annum by the sales representative = £200
  3. Average cost per sale = £2000

This is an underestimate of the cost of customer acquisition as it ignores work on advertising, promotions and administration.

  1. Annual revenue from customer = £10,000
  2. Average number of years of loyalty = 2 years
  3. Profit margin = 10%
  4. Customer lifetime profit = £2000

This may appear to be a breakeven situation but the prospective customer lifetime profit is an over-estimate as profit margins will vary between customers.

So in this example the company is actually paying to acquire the customer.  The cost of acquiring the customer exceeds their worth to the company.

Once you have obtained a new customer, your next task is to keep them.  You have to develop a customer and move them through development stages.  This is often referred to as the ‘customer ladder’.  Customers move from prospects, to first-time customer, to client, to advocate, to member, to partner, to part owner.

To make a first time buyer a client, they must be satisfied; not dissatisfied or ambivalent.  It is therefore crucial to develop a customer satisfaction index and to listen to your customers.  You need to estimate the cost of losing customers.  Do you need to improve your customer services.  remember social media makes it very easy for dissatisfied customers to tell others.  You need to resolve customer complaints quickly.  You need to accept responsibility to win back goodwill.  Remember ‘the customer is king’.

Once a first time buyer becomes a repeat customer, you need to identify key accounts.  You need to classify customers by ‘depth of repeat’.  You need data on frequency, recency and monetary value of a customer’s purchases.

Remember retained customers are better targets for cross-selling and up-selling.  They reduce the cost of service through familiarity with your products and systems.  Highly satisfied repeat customers become advocates and create word of mouth.  Long-term customers are also less price sensitive.

Advocates represent the statements “the best advertisement is a satisfied customer” and “Satisfied customers become apostles”.

In some markets it is possible for satisfied customers to become members e.g. a golf club will often accept ‘pay and play’ customers but to survive in the long-term it will need a robust membership.  Car manufacturers operate owner’s clubs which offer special benefits and privileges.  Rock bands and TV shows develop fan clubs.  If customers switch away from these clubs, they lose the membership benefits.

In B2B markets, often the aim is to develop a partnership with a customer.  Software firms get customers to help develop and amend their products.  They use beta testing where trusted customers get to use prototype programmes, to identify bugs and to suggest improvements. Aerospace manufacturers will work closely with engine manufacturers.  The finished aircraft will be an effective joint-venture.

In a part-ownership model, the customer is a critical stakeholder.  This is the model used by building societies, cooperatives, community owned pubs, credit unions and buying clubs.  Customers have a direct say in the organisations policies and procedures.

So, if you want you business to be a success in today’s highly competitive business environment, it is not enough to garner new customers, you need to keep customers and develop them not just in terms of profit growth but in terms of an ever closer relationship.

 

 

Goodbye 2017

Over the Christmas period, I have been reading Marketing Due Diligence by McDonald et al.  In the book Professor Malcolm Macdonald and his colleagues discuss how to link marketing activity to a firm’s share price and other financial measures.

The book is an attempt to explain the theories behind marketing strategy in a way understandable by senior managers and company directors.  Many of these individuals come from a financial background and look at marketing in terms of financial results only.  They ignore methods of measuring success, such as Kaplan and Norton’s Balanced Scorecard, which look at corporate success in terms of long-term growth, as opposed to short-term financial gain.

McDonald exposes the fallacy that marketing has failed.  That consumer power has exposed traditional marketing activities as irrelevant.  He argues that there is gross ignorance amongst many senior managers as to the power of marketing strategies and this means that this ignorance has led to mistaken definitions of marketing’s role in a business.

The truth is that marketing is a core business activity and traditional marketing activities have as much power today as they did fifty years ago.

McDonald argues that too many businesses give marketing professionals a subsidiary role in their business.  Often these companies concentrate on a product, technical, operations or financial focus.  Marketing’s secondary role in these firms means that it is never truly effective.

He also has concerns that some in the marketing industry are overly evangelical about their profession’s role in business and that marketing should be the core of the corporate universe.  Marketing is similar to finance and other business disciplines.  It is a functional profession with its own body of knowledge, processes, tools and techniques.  Marketing like these other professions has its own professional institute, the CIM, which prescribes, researches, examines and develops the marketing discipline in the same manner as other professions.

McDonald argues that marketing shouldn’t be given priority over other professional disciplines but that it should be given equal status to them.

However, it is clear that marketing is a pivotal strategic process and important to business leaders.  It should flourish at three different levels in a business:

  1.  Senior managers and business proprietors need to understand and enthusiastically embrace the concept of customer service and the development of a customer-focused organisation.  the creation and maintenance of customer satisfaction should be the only route to long-term profitable success.   There should be an organisation-wide market-driven culture of superior customer service within a business as this route to success offers significant sustainability.
  2.  Business strategies must start and be evaluated against the needs of the market.  Marketing activities must have a strategic focus and an organisation’s future must be planned from the market inwards.
  3. Promotional and marketing tactics must be implemented within the context of an overall marketing strategy and be market-led.  Such tactics must meet the professional standards expected in such areas as market research, promotion and sales.

Customer satisfaction and customer focus are not simply the domain of the marketing department.  They should be the core concept throughout all of an organisations activities.

Marketing has a central role in the creation of sustainable competitive advantage.  As Kelly states in his paper Customer Intelligence; From Data to Dialogue (2005), ” the customer is the fulcrum of the business and everything from production ,to supply chain, to finance, risk management, personnel management and product development, all adapt and converge on the business value proposition that is projected to the consumer”.

This means that marketing activities need to be controlled at three levels:

  1.  Marketing due diligence; whether marketing activities enhance or destroy shareholder value on the basis of an objective assessment and how strategy will be improved.
  2. Marketing effectiveness; that tactics applied to each chosen market segment targeted by the marketing strategy create the expected competitive advantage
  3. Promotional effectiveness: That marketing communications activity achieves the required objectives in terms of awareness, brand recognition, etc.

Measuring marketing effectiveness is not like factory output.  It is easy to measure what goes into a factory and what comes out, i.e. productivity.  It is not easy to measure the outcomes of marketing activity.  This fact is not grasped by many non-marketing professionals.  Productivity can be measured at the factory gate whereas the results of marketing activity may not be clear until many months after the strategy has been enacted.

What is the value of marketing?

Marketing professionals are always under pressure to add value to an organisation’s brand or identity.  But what does adding value look like?  The answer is that the definition of value depends on the type of organisation and the developmental stage of that organisation.  If you are going to measure the success of your marketing activity on the addition of value, you need to define the measures of value to be used from the outset.

For many businesses the sole measure of marketing success is financial return on investment.  Such a measure is important but you should consider the wider aspects of value in measuring marketing success.  That could mean a wide range of results including increasing consumer advocacy, the expansion of your product or service range, increasing the number and types of distribution channel used by your organisation or even by changing your organisational structure.

In the latest edition of Catalyst, the Chartered Institute of Marketing’s quarterly magazine, several different organisations give examples of the value of marketing to their business:

  1. The first example is a small family business which makes curry sauces.  For years the owners of the company were wholly focused on getting their products into shops.  The focus was on the place and product elements of the marketing mix and other mix factors such as promotion, price, process and physical evidence were all but excluded.  In 2016, the firm’s proprietors decided to take a wider view of their marketing activities.  They wanted to develop a brand identity and grow beyond their existing distribution chain.  To develop the brand, they found they needed to tell their brand story more effectively and they needed to develop a consumer focus.  By analysing the response from their customers they found that their business was seen as a fun, family brand with a tasty product.  To engage with their consumers, the firm developed a range of promotional materials focused on their fun image.  They were also able to use the responses from their customer survey as evidence in achieving a distribution deal with a major supermarket chain.  For this business marketing success wasn’t just improved financial returns, it was a closer link to their customer base, increased distribution and the creation of a brand identity.
  2. The second example was a major arts and entertainment venue.  This venue contained museums, a theatre, retail units, bars and coffee shops.  Each of these activities were used by different customer segments. Each group of customers had different value expectations.  Using strategic marketing plans, the venue was able to develop distinct strategies for different groups of target customers.  The management of the venue had the perception that customers came to their venue to see a particular piece of art or a particular show.  Market research showed that there was a commonality between different customer segments, that they wanted to go out to the venue and have a good time.  Marketing value to this organisation was the development of closer ties to its varied customer base and the development of feedback systems to ensure that what was offered by the venue met the expectations of visitors.
  3. The third example given in Catalyst was a publisher of academic textbooks.  Marketing told this business that their client base differed from its consumer base.  The firm marketed its books to academics and saw itself as part of the academic community.  However, it was undergraduate students who were the consumers of its products and services.  The firm therefore had to produce texts which academics would refer as standard texts for their students but which also met the educational expectations of those students.  The organisation found that different marketing channels were appropriate for different academic sectors.  Marketing value to this business was the ability to widen their communications strategy and to match the communication expectations of different recipient segments.
  4. The final example is a firm which produces virtual reality software for industry.  for many years, this organisation saw its success as the success of its customers.  However, management realised that they were good at telling other people’s story and not their own.  By applying strategic marketing, the firm was able to redefine itself in the market.  It was able to focus on the critical parts of its business and to discount areas which were no longer relevant.  This led to a complete reorganisation of the business’s structure to better match its new priorities.

The above examples clearly show that marketing value and success are not simply a matter of financial return.  There are a wide range of non-financial measures which define marketing success.