Virtually all business owners know they have to allocate funds for customer acquisition. But in a maturing economy, budgeting for activities that build value from current customers while keeping them loyal is even more crucial.
“All the easy growth has occurred,” write Don Peppers and Martha Rogers in their book, Return on Customer. They point out that customers are every enterprise’s most valuable asset. “Companies that recognize this fact enjoy a huge competitive advantage,” the authors advise.
Customers generate short-term financial health by current purchases, but they also represent one of the most significant financial factors when it comes to company growth and stability. Few small businesses know what their customers are really worth – or how to build their companies by growing the value of their customer base.
Complex, sophisticated database techniques – and the resources to conduct in-depth analyses and modeling - are readily available to large corporations. But small businesses can also take some immediate, low-cost steps to retain customers while also growing the customer base as a financial asset.
Businesses commonly keep track of customers’ spending histories and habits via customer relationship (CRM) systems, and they have access to a significant amount of customer information. Few companies, however, take time to analyze the data from a purely financial context to decide where and how to spend retention dollars. That can be a costly mistake, according to Carolyn Goodman, President and Creative Director of Goodman Marketing Partners, a full service, multi-channel, direct response marketing company based in San Rafael, California.
“At some point, you have to say to yourself: ‘I simply can’t afford to talk to everybody over and over and over again,’” she says. “So, you have to ask yourself, what am I selling? What am I asking my customers to purchase? And, how many of them do what I ask them to do?”
At the heart of the matter is figuring out your most profitable customers – or those customers with the highest likelihood of future profit. Goodman explains it’s “pretty easy” to quickly organize a cursory financial review of your customer base by how much money each customer has spent with your company. She says this first step is simplistic, but should yield an “Ah-ha” moment.
“You should be able to clearly see the top purchasers,” Goodman says. “[The result] is usually that 20 percent of your customers are delivering 80 percent of the company’s profit, a fact that surprises many business owners. If you don’t have that big ‘ah-ha’ moment, then you aren’t doing [the review] properly.”
Analyzing the customer base is key to keeping marketing budget figures under control and ensuring a strong return on investment. “The starting point is: how much money have you set aside to promote your products and services? Then, analyze how much of it is spent on getting new customers in the door, how many of them are you acquiring, and what is the return on investment over time?” Goodman says.
“The ability to profitably manage customers is dependent on analyzing all the financial facts, and budgeting appropriately,” says Goodman. “Knowing how much revenue each customer or a group of like customers generate over time will help you figure out what they’re really worth to you versus how much money you’re spending on retaining them.”
Never delete any customer from the database entirely, Goodman cautions, because there are opportunities to cross-sell or up-sell them. Instead, invest in testing different ways of talking to customers and offering them different products or services. “Try to change their expectations about what you’re selling them. When you come out with a new product, include that group of poorer performing customers in the mix, to see if you can revitalize them again,” says Goodman.
Revenue generation alone isn’t the only value attribute companies should review. According to Goodman and other experts such as Sunil Gupta and Donald Lehmann, authors of Managing Customers as Investments, companies need to look beyond short-term purchase transactions when determining the worth of a customer.
“Creating shareholder wealth in the short run is not the main purpose of an organization,” write Gupta and Lehmann. Instead, they say, organizations that manage customers profitably and as investments focus on creating and building customer value. Those organizations are rewarded with long-run stability and financial success.
