Concentrate on Current Clients or Advertise for More?

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Ashley_Price

Ashley_Price

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  • #1
    I'm currently reading "The 80/20 Principle" and it talks about how most things in life are controlled by this rule; so, in business, 20% of your customers provide you with 80% of your profits (of course it might not be exactly this, but it will be nearer to it than 50/50).

    So I wonder - depending on the business - if a firm could be successful just concentrating their money and time on current clients and not actively advertising for more?

    Of course, I'm not saying if new customers come along (through word of mouth, etc) you shouldn't provide your service to them - of course you should - but I'm thinking about whether you should spend a lot of money advertising for new clients.

    Obviously there are lots of industries out there that have to have a steady stream of new clients, but perhaps for the others you're better off letting that side grow organically.

    What do you think?
     
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    David Griffiths

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    • Jun 21, 2008
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  • #2
    I've seem some stats that suggest that the top 20% of customers might provide 225% of the profits, and the other 80% absorb the surplus 125%. That's for a service industry.

    I think that you have to work out which of your clients are worth concentrating on - it's a fair bet that you'd be better off without the bottom 20% at least, so why not fire them? There are more than a few instances of businesses being more successful doing this, but it takes a leap of faith to actually turn away business. Try it on on customer a month!

    There's only merit in concentrating on existing customers if you actively upsell and cross sell to them. You should at least make them aware of the services that you provide that they are not taking. It's galling to find a customer going elsewhere for something that you do because they didn't know.

    I think that you also have to spend some time on new leads. Existing customers won't be with you for ever - they will close their businesses, move on, go bust or retire. So you need to generate new leads to cover what falls off the back end. That needn't be expensive - referral processes are cheap and work very well - if you follow them through.

    It's a question of balance
     
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    davidshaw89

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    Jan 19, 2008
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  • #3
    While existing customers are a fantastic source of new business, you also need to consider the "all eggs in one basket" rule - you will need a broad enough customer base so that if your main customer cancels their account, you have a backup.

    By far, existing customers should be the easiest to sell to if you have already exceeded their expectations, but you probably want to look at bringing a few more new customers on board as well.
     
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    I

    iboxsecurity

  • #4
    You need to ensure you are still able to provide the same level of "excellent?" service to your current customer base if you go looking for new customers and give them that level of service also - basically dont leave your current customers to feel left out when looking for new customers.
     
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    S

    sm1

  • #5
    I'd mirror what's said about being careful if a customer drops out.

    Also - I think you're looking at advertising in the wrong way, you say about it being a cost, however it's an investment as it should return money, rather than being money that's just spent.

    Cheers
     
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    J-Wholesale

    J-Wholesale

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    Jul 13, 2008
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  • #6
    If you're advertising online, you should be able to work out exactly what a new customer costs you. I read an article recently where Amazon were spending $33 on advertising to secure 1 new customer. Once you know this, and if it turns out that the spend is worth it, then there should be no reason to cut down on your advertising.

    As for your existing customers, you should try to find a way to eliminate the lower end of your customer base - the customers who take a lot of work but bring in little money. This is especially true if you're in an industry with a high percentage of repeat customers, as you seem to be. Better to spend your time keeping good customers happy, than waste your time working to please customers who bring you little revenue.

    We did this ourselves by raising our minimum spend. Even in the current economic gloom, when our competitors were dropping their minimum order sizes, we raised ours. Yes, we lost customers, but they were the customers we never wanted anyway.
     
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    FireFleur

    FireFleur

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    Oct 29, 2008
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  • #7
    The 80 / 20 rule of thumb is quite powerful, it can be abused but it is generally accurate.

    In a given company 80% of the work is done by 20% of the people. 80% of the revenue is created by 20% of the people. 80% of your revenue is created by 20% of your customer base etc etc.

    Going for volume over quality is never wise, I have often seen that step before a company goes belly up, volume extends your liability, whereas quality reduces liability it so you are strengthening in both directions.

    It breaks down at smaller numbers where dependency occurs, but as long the numbers are high enough then quality is the way to go, and reduce volume. Though at large numbers you can get economies of scale, you often see it as diminishing returns supported and enforced by a monopoly position.

    It is all rules of thumb though, at times other approaches work well but what shall we say 80% of the time the 80 / 20 rules is about right, 20% of the time not :)
     
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    Ashley_Price

    Ashley_Price

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  • #9
    This year has been great for us, with many of our new enquiries coming from UKBF! I don't "advertise" on here, but I do pay to be a full member and as you can see from the number of posts I've done, I'm quite an active member.

    It seems to me that if you provide your current customers with excellent service then they will over time pass your name round (providing you keep prompting them), and as we provide a number of different services there are more things we can sell to them.
     
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    muppetdave

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    Oct 28, 2008
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  • #10
    Interesting post. As we've all agreed the principle of this is pretty accurate

    One thing I did notice someone mentioning was 'why not get rid of the smaller, nt so good customers' be really careful if you do start customer killing. Unless a client is actually bad - i.e. doesn't pay, creates a lot of long term debt etc, then leave them be. If you start customer killing, you then remove contribution to your overhead etc. Unless you're in a massively technology-supported business, where the 'operation' is in place whether you have 2 or 200 clients, you then reduce the profitability of all clients.

    As someone mentioned, looked at what the cost of gaining each client is to the business, and then develop a marketing strategy that works on this basis, hopefully at a lower cost (if most of your leads are coming from UKBF then great and low-cost). Make sure you spend some of your budget on retaining existing clients - they are the cheapest ones you will acquire!
     
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    KateCB

    KateCB

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    May 11, 2006
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  • #11
    Interestin - I have read similar things, however I feel that you look after what you have (Customer loyalty schemes are there for a reson - keep what you have happy!) AND always look for news ones.

    An accountant told me once that 25% of your customers are the ones you could do without, because these are the 'difficult' ones - the ones that take 5 hours of our time to spend £100 - then again, I have found over the years that my 'difficult' customers are the ones who in fact appreciate my time, advice and attention to 'their' detail - these are the people who tell others about us, because we took the time with them - others who order perhaps coplicated tanslation and design work and spend little time in the initial ordering/requirement process simply accept their finished goods and rarely say 'thanks' or remember even who did it!

    Look after them all....they ALL help pay the mortgage, and if there is opportunity for new custom, go for it every time!
     
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    KidsBeeHappy

    KidsBeeHappy

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    Oct 9, 2007
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  • #12
    When implementing/analysising customers & revenue etc with the 80/20 rule, make sure you do it with the hard facts written down in front of you. It is all too easy to have favourite clients, and those that you "feel" are the most profitable. However, when you look at the billing results you may well find the opposite of your initial thoughts.

    Local auction houses hold usually a 6-12 "antiques" auctions every year, catelogued and high value, highly desireable items. But it aint these that pay the bills, its the weekly auctions every week selling secondhand fridges and sofas.

    Don't be distracted by bling.
     
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    Ashley_Price

    Ashley_Price

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  • #13
    Boxby said:
    When implementing/analysising customers & revenue etc with the 80/20 rule, make sure you do it with the hard facts written down in front of you. It is all too easy to have favourite clients, and those that you "feel" are the most profitable. However, when you look at the billing results you may well find the opposite of your initial thoughts.
    Click to expand...

    Oh, I know this very well - see my blog entry Are They REALLY Your Worst Customer?.
     
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    S

    stevon

  • #14
    Pareto's principle is an interesting one. Its not always the case (it isn't for me, at least in terms of actual sales) but it's something worth knowing about and being aware of, as you seem to be.

    I wouldn't recommend axing customers though, unless of course a barely-profitable client is costing you a more profitable client?

    I take care of my most profitable clients first, admitidley, but I was (initially) totally dependant on them, so I guess its habit, more than anything else.
     
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