Angela Prilliman posted an interesting question on American Express’s OPEN Forum:
As a small business owner, the majority of your marketing and advertising budget should be focused on who: New customers or loyal customers?
We know that there should be a balance of customer acquisition and customer retention marketing efforts, since both are important. But which way do you lean and why? Which brings you the most revenue?
Although I gave a brief answer on the OPEN Forum (due to limited space), I believe this topic deserves a full answer.
What Business Stage Are You in?
While it is easy to point to reasons why one is superior to the other, to give a complete answer, we really need to look at the business itself, and specifically what stage the business is in, as the answer differs depending on certain factors.
Startup / Growth Phase
This phase should probably be all about getting new customers, and keeping those customers happy. Where possible, you should encourage people to reorder, or order additional offers, but at this stage of the game, you need lots of new customers to remain stable.
You don’t want a situation where an extremely profitable customer leaves, and it takes a giant chunk of your revenue. The more customers you have, the more stable your revenue will be. So new customer acquisition should be the priority.
Unique or Innovative Product or Service
Another situation where you want to focus on new customer acquisition is when you have something unique that is not offered in your market, or has limited availability. You want to get as many customers as you can before someone copies your idea, and starts competing against you.
There is a huge advantage to being first. It may not be foolproof, but incumbents are always harder to unseat than a new business. If you are unique and innovative, you have the opportunity to become the incumbent. Take advantage of that.
Looking for Investors or to Sell the Company
Investors and people looking to buy your company are going to look at growth, revenue and profitability, among other things.
If you already have a significant base of customers with significant revenue, then focusing on increasing profits by making additional sales to existing customers would be ideal. You don’t want to neglect new customer acquisition, but increasing profits through repeat or addon sales may give you the boost you need to your numbers.
If you do not have significant revenue yet, then you probably should take more of a balanced approach, to try to increase both the customer base and profitability per customer. Basically, do whatever makes the numbers look better, and what works for you.
If you are marketing in a saturated market, where the only way to get new customers is to steal customers from your competitors, then it is time to start focusing on making your existing customers more profitable. It is much easier to make a sale to a satisfied existing customer, than to steal a customer away from your competitor.
Also, increased marketing to loyal customers in a saturated market can help keep customers loyal, especially if you offer them special offers and deals only available to existing customers.
Somewhere Between Startup and Saturated
If you are somewhere in the middle, a more balanced approach may be best. Your company would benefit from both strategies.
Don’t Leave Money on the Table
While you should spend time marketing to both new customers and loyal customers, new business should probably concentrate on new customer acquisition, while businesses in more saturated markets should focus on increasing the profitability of existing customers by increased marketing to loyal customers.
But, either way, do not neglect one over the other. Otherwise you are just leaving money on the table.
Image courtesy of Sheela Mohan / FreeDigitalPhotoes.net.