At the February 2016 meeting of the GKIC London Chapter, the main presentation from David White was…
“Three Ways To Increase The Average Value Of A Customer”
Increasing the average value of an existing customer should be a priority for most businesses for a number of reasons.
Firstly, there’s the old direct response marketing wisdom that the easiest sale is to an existing customer. After all, you’ve already done a lot of the hard work by establishing a relationship and getting them to buy from you in the first place. They already know you and the act of buying indicates some degree of liking and trusting you.
But there’s more to consider…this from Dan Kennedy in the January 2016 issue of the “No BS INFO-Marketing Letter”…
“I’d point to (a) my predictions and reports of genocide of middle class coming to fruition…new Dec. report shows the middle class no longer the majority US demographic, first time since before WWII (b) concentration of spending into fewer ‘n fewer categories (c) rising health insurance/care costs (d) stagnant wages (e) job erasures, sky-high percentage of able workers opting out, leaving millions of unfilled jobs (f) onerous gov’t burdens and interference (g) overall consumer and investor anxiety (h) investor/capitalist and corporate leaders’ vehement disapproval of tax and other policy so ‘capital on strike’ (read Ayn Rand) continues to pile up and sit idle.”
Put another way, most businesses face an ongoing squeeze on profits with costs increasing relentlessly and customer value at risk of declining because of (a) ongoing competition and (b) increasing commoditisation of many products and services because of the impact of the internet and information technology.
So, it’s vital to defend profitability and increase the average value of a customer if you want to survive, let alone prosper, in the years ahead.
Three ways to increase average customer value are…
- Source better quality and higher value customers in the first place
- Market harder to existing customers
- Get MUCH more revenue from a small group of high-end customers with premium (even super-premium) products and services
Let’s take a look at each of these in more detail…
Strategy #1 to increase average customer value – select better quality customers in the first place
There are two aspects to consider, to my mind. Firstly, you may be advertising or placing lead magnets in the wrong place. The result is that you don’t attract the kind of customers you really want. There’s a lot of evidence, for example, that customers sourced through online channels are not as valuable as those found offline.
Secondly, and a little more strategically, you may be targeting a sub-optimal group in the first place. The middle ground is generally a difficult place to be. Even though the middle market remains large, it’s not as attractive as it used to be. Specifically seeking out a more affluent group of customers could well pay big dividends. Of course, this may require some changes to be sufficiently attractive to these higher quality prospects.
Strategy #2 to increase average customer value – market harder to existing customers
The deeper point behind this, apparently obvious idea, is that you are marketing with imperfect information. For example, most of the time you’re making assumptions about pricing and what the market will bear. The only way to find out for sure is to test different price levels. It’s almost a marketing cliche that most businesses are undercharging. In most cases, raising prices modestly results in no appreciable loss of customers but significantly higher income (that flows straight to the bottom line).
In the same way, most businesses have room to make more offers and run more promotions to existing customers, without suffering negative consequences.
Strategy #3 to increase average customer value – get MUCH more revenue from a small group of high-end customers
Once again, it’s a common idea in direct response marketing to offer premium versions of a product because some people will always be prepared to spend more. But why should that be the case and how many will want to spend more?
The answer lies in the Pareto Principle, or the 80/20 rule. This is the observation that roughly 80% of sales will come from 20% of customers. Taking it a step further, 4% of customers will account for 64% of sales. Perry Marshall’s book “80/20 Sales And Marketing” takes a look at this in more detail. The key points, to my mind are…
- Your best customers are prepared to spend MUCH more than your average customers; BUT…
- You need to deliver the value to justify the higher prices
That’s why you need to have a very high-end “Premium” product…AND it needs to be truly a high-quality offering.
So three ways to increase average customer value…with a little more to these ideas than might initially meet the eye. The first one is more of a medium term strategy, but the other two can be implemented in the short term.
By the way…the next meeting of the GKIC London Chapter is fast approaching on Tuesday March 15. Details at the GKIC London homepage. If you’re in the London area and a practitioner of direct response marketing in any form, you’ll find this a very worthwhile afternoon. Discussion and dissection of direct response marketing strategies and tactics, along with guest presenters providing different viewpoints and simply the opportunity to meet up with like-minded folk and talk business.