Tuesday, October 19, 2010

Turbo Charge Your Profits

When times get tough, Marketers often find themselves in a quandary: management insists that they target everyone -- to leave no stone unturned in seeking out the very last customer that might be willing to patronize their business.  “Drive traffic” is a frequent refrain from executives such as these.  They want volume, volume, and more volume regardless of the quality of the customers who are brought in as a result of those activities.

What’s wrong with this approach?  After all, more prospects means more revenue and more customers, doesn’t it?

The answer is yes, if all you measure is short-term revenue and traffic.  You can spend and spend, and drive in lots of customers in a short time.  But will those customers make profitable purchases when they come do in, not to mention their value over the long term?  Our work over the last ten years says clearly not. 

The problem is that all customers are not equal, and neither are all prospects.  What do I mean by that?  It is true that we are all special to our mothers, but that does not apply when valuing customers to a business. 

As consumers, we all have different relationships with different companies.  Some of us shop every month at Best Buy, some of us only once per year and some of us not at all.  That does not make us better or worse people; rather, we just have different needs that are met at different businesses.  The revenue from my Best Buy purchases might be $1800 this year, made up of a laptop and a television; my friend’s might be $20 from two DVDs.  So should Best Buy market to us the same?  Probably not. 

How much is it worth to bring in a customer like me?  If the margin on my $1800 purchases is 20%, then customers like me are worth $360 for one year’s purchase.  If I continue to purchase from Best Buy for three years, then I am worth about $1080.  If my friend purchases two DVDs then, at the same marginal profit rate, he might be worth $4 per year, or $12 over three years.

So if the value of customers like me is almost 90 times more than customers like my friend, should you market to both of us the same?  No way.

If you spend more on customers and prospects who are worth more, and spend less on customers and prospects who are likely to spend less, you will attract more of the high profit customer and less of the less profitable.  Net result – more profit for you and a promotion soon to come!

So when your executives come asking for more, give them more – more profit, more high-value customers and more ROI from your marketing programs.

Mark Price is the Managing Partner at M Squared Group, an Eden Prairie-based data driven marketing consultancy.  He also writes the blog, Cultivating Your Customers, and is  a frequent contributor to RetailWire, an online marketing think tank focused on the challenges facing retailers and e-commerce.

Mark Price is a featured speaker of the "Managing it All" B2B breakout session at this year's MN AMA Annual Conference "Conquering Chaos".

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1 comment:

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