There are some concepts in business that can’t ever be underestimated and can single handily improve a businesses ability to profit and succeed. As I’ve said before, business is all about relationships. How you treat your employees, business contacts, B2B partners or customers will go a long way in generating positive returns beyond the simple financial health of the business.
No business can survive on customers alone; a business needs to concentrate on turning any prospective customer into a client. What’s the difference? A customer is a one-time transaction with no loyalty to your service or product. A client is someone whose repeat business can be forecasted, expected and maintained over a long period of time.
Any business just starting out has to get its name out to its target market in the hopes of attracting customers. This may mean paying for ads in local media, promotional functions or offering incentives for attracting customers to your point of business. When your first customer walks through the door and spends $1.00 a good approach is to think of the following…
If a company needs to spend $0.30 in advertising for every new customer dollar it receives in sales, then consider that you’re only receiving 70% of the potential revenue you could have generated if that person was a client. If every customer only comes in when they hear a radio advertisement, read of a sale in the paper or when you mail something out to their home, then you’re getting less than $1.00 for every dollar they spend.
The goal is to create a relationship with these customers and turn them into a client. A client doesn’t necessarily need an incentive or promotion for repeat business. Instead of spending money on marketing activities to attract one-time customers, you’re creating repeat transactions and capturing the full value of every dollar spent. No business can successfully operate on anything less than a $75-cent dollar; so calculating this number for a consumer discretionary stock is a great way to value the business. You have expenses, overhead and other costs to factor into your break-even point, but once you’ve advertised and created brand loyalty, very little incentive should be needed to attract a customer back again. This retention is what I term a “client.”
Once this is accomplished, you next want to focus on the relationship between revenues & the client share of your business. It’s often said that 80% of revenues come from 20% of customers, which is true. But consider if you could generate an addition X amount of your revenue by simply increasing the share of full $1.00 client purchases by increasing your client base. Instead of being vulnerable to 20% of your customers for such a significant share of your revenues, you’re diversifying the risk you’re exposed to if something should change in their buying behaviour.
Concentrating on CLV (Customer Lifetime Value) is also another tactic a business may wish to determine & focus on improving. The CLV is an estimation of what each client is worth to the business over the life of them purchasing a product or service. A client purchasing $1.00 of goods each day for 20 yrs could be worth upwards of $7300 to a business. That might not seem much, but if your client base consists of 10,000 clients over a period of time, that is too significant a chunk of your revenues to simply ignore. Each client will have different purchasing habits, loyalty and expectations of your business, but focusing on important groups and consistently increasing the CLV of those clients can dramatically influence your profitability.
Remember that clients come for repeat business not because of your advertising efforts, but because they value something you offer in comparison with your competition. Focus on this and you’re one step away from creating a competitive advantage.
