You've all heard about the lifetime value of customers. But their value is far more than just the sales value of them staying with the same model car, as an oft quoted example gives. Existing customers are more profitable than new customers
Behind the saying is the fact that existing customers are more profitable to you than new customers. Yet businesses are constantly extolled to sell more, without any qualification what so ever. We are told "revenue is tied to sales volume". Quite true, but.....
No-one would argue with the proposition that business begins with the sale, but which sale and to whom can be important. The wrong sale can cost you profits either directly or as an opportunity cost. By opportunity cost we mean the same sale elsewhere might have made you a higher profit. Remember the 80/20 rule. Eighty percent of your profits will come from twenty percent of your customers.
Perhaps Dan Kennedy. Well known marketing exponent, had it right when he said "It's infinitely easier and always more profitable to work at increasing the purchasing of your satisfied customers than it is to go out and add new ones."
We wouldn't disagree. There are many reasons for this, but amongst the most important are that you have established your expertise, credibility and trust.
It costs money to acquire new customers and to set them in your system. And new customers tend to buy in smaller amounts.
Businesses often spend a small fortune to get new customers. Think of your advertising. Some of it is intended to remind people of your business, but mostly it is intended to encourage new customers to buy.
There are three good reasons why is important to concentrate on existing customers.
- Existing customers cost less to service, are easier to service because you are more likely to know and understand their requirements.
- Because they trust you they are likely to buy more often, and to buy more expensive products or services.
- If they become raving fans they are also more likely to refer others to you. Word of mouth is the most powerful form of promotion.
The benefits of intentionally focusing most of your selling and marketing efforts on your current customers are: lower costs for additional sales, greater customer loyalty, higher customer satisfaction scores, and more profits.
So just how might you go about increasing sales to existing customers, and increasing the profits to your business by more than if you just got out on the street and chased more sales.
If you could keep the same number of customers but increase the size of their orders you'd increase your revenue, and if you managed to do that without reducing your margins, you would increase your profits.
Or if you could keep the same number of customers, and the size of their order, but persuade them to consume more often and therefore order more often you would also increase revenue.
Let's work through three ways you might do this in your business.
1. Building on the ideal customer.
- Take a market segment you service - for example, professionals. Can you narrow it down to , say, lawyers.
- Look at your best legal client and analyse the products or services you sell them, the volumes, values and timing.
- Repeat with the other legal firms you service.
- Adjust for the comparative size of each firm. If you don't know their size the number of employees will give a good indication.
- Look at the gap between the sales to your best client and each of the others. That is your potential gain.
- Brainstorm with your team what you know about each business. You will be surprised at the cumulative knowledge in your business.
- Develop a targeted proposal and approach for each client.
2. Leverage off the usage cycle of your product or service. It works like this:
- Many products or services have usage cycles or maintenance intervals. Think of a regular check up with your dentist, or the spectrometer which requires recalibration every xxxx hours, or even your car.
- Send out reminders before the cycle is due. Dentists often do this, car dealers don't. Remind the customer the service is due and the benefits they get from a regular check-up.
- In fact you may wish to make an "assumed sale", where you advise them that you have booked them in for a certain date or time.
I recently developed a program for a children's clothing shop, with a "club" a special gift each birthday and a reminder program before the birthday.
3. Staying in communication, developing and building the relationship. You can't have a relationship with new customers. You can with existing customers, and that gives you the ability to maintain regular contact and offer targeted specials.
So at the end of the month where are you. You don't have to chase a raft of new customers for payment, you have no more companies on your list but your return per sales call has gone up, your sales have gone up, and, more importantly, so have your profits. Through practical experience you have found that it is far easier, and more profitable, to sell to existing customers. Another profit leak has been plugged.