Are You Creating Profitable Customers?

by Martha Hess

Late last year, my article entitled, Does Marketing Matter?, addressed the role of marketing in addressing the #1 concern of CEOs; sustained and steady top-line growth (2006 Conference Board CEO Challenge Survey).  For the inaugural issue of Cerius Edge, I'll address the #3 concern of SMBCEOs; customer loyalty and retention.

Marketing has been defined as "the art of finding and keeping customers".  Philip Kotler, Professor of Marketing at Kellog Graduate School of Management, defines marketing as the "science and art of finding, keeping and growing profitable customers".  This is an important distinction because examination of the most profitable companies suggests that they are invariably successful in retaining and cultivating current customers, while in contrast, unprofitable companies spend a disproportionate amount of resources trying to obtain new customers only to lose their business down the road.

Savvy marketers, however, consider keeping and growing customers to be a primary marketing activity.  What is the disconnect?  It could be conventional wisdom  --  the belief that customer acquisition fuels growth  --  oftentimes, it is simply the absence of a corporate customer database.  This situation can be reversed when there is executive vision, leadership and commitment to the importance of increasing business profitability through the customer base.  In other words, the business imperative then becomes the marketing imperative.

It is understandable that CEOs view customer retention and loyalty as a top 5 concern  --  consider the economics.  A great deal of investment goes into acquiring each new customer, and part of every competitor's marketing strategy is to lure them away.  A lost customer is more than the loss of the next sale.  The company also loses future profit of that customer's future purchases.  There is also the cost of attracting a replacement.  It is often stated that the cost of attracting a new customer is 5 times the cost of keeping current customers.  In addition, it will take years for the newly acquired customer to build the trust it takes to buy at the rate of the lost customer.  Raising retention by as little as 5 percent has often been shown to increase company profitability by as much as 100%.

Not in all, but in most situations focusing resources on maintaining and growing business from current customers should be the primary marketing goal, with acquiring customers a secondary one.  All companies do need to attract some new customers if only because the most loyal customers eventually die.  As a result, how to efficiently and effectively create prospects is key, and attracting customers that cannot be retained and cultivated over the long run is counterproductive to short or long-term profitability.

Empowered with executive support and a customer database, what do good marketers focus on?

1)    Identify and profile profitable customers. In Philip Kotler's version of the Pareto Principle chart, the top 20% of customers generate 80% of profits, while the bottom 30% of customers eat up 50% of the profits that the others produce. This is fundamental data needed to build a customer program, but equally valuable data for the Sales organization always looking for help from Marketing.  More knowledge on who to target increases sales productivity  --  more help to the bottom line.

2)    Once you have identified customers that contribute to financial performance, build a Customer Retention Program with the goal of  1 ) increasing "share of wallet" and 2) aim not just to create customers but fans.

Lastly, if you always migrate  and reallocate marketing dollars towards higher ROI efforts, profits will grow even as the marketing budget stays flat.

Martha Hess is the Vice President of Marketing and an Interim Executive for Cerius Interim Executive Solutions, the largest provider of Interim Executive management services.
 

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