We begin with a simple question:
Are all customer transactions equally valuable to your company?
After all, money is money, right?
If you’re launching a new business, the answer might be, “Heck yes. Sell, sell, sell, and let the chips fall where they may.” And to be fair, that philosophy can carry you through the first few months, maybe even the first few years if you’re lucky.
But at some point you hit a margin plateau. Every business does, B2C or B2B. Competition seeps in. Raw goods and cost of goods sold creep up. Prices get pushed down. A previously rich marketing oil well starts to run dry.
In technical terms, your Customer Acquisition Cost (CAC) is climbing relative to customer lifetime value (LTV). Something has to change if you’re going to pull through.
At some point, the only efficient way forward is to put your marketing focus on the right kind of customer transactions.
I say “customer transactions” because I’m combining two ways to focus your marketing: targeting the right prospects, and promoting the right product mix to those prospects. You can absolutely look at your customers through one lens and your product mix through another. That is totally legitimate. But for this post, I’ll combine them into customer transactions, the intersection of the right segments and the right product mix. I’m getting a little ahead of myself, though.
The Pareto revenue focus principle
Let’s start at the most basic level. If not every sale brings the same value to your company, then we have to ask ourselves: how do we know where to put our marketing focus? Marketing resources (dollars, people, tools, knowledge, technical debt, and so on) are limited by definition. You can’t just throw more money at the problem. It’s time to get strategic.
You have probably heard of the Pareto Principle, or the 80/20 rule. It says that 80% of outputs come from 20% of inputs. Put a little less abstractly: you might find 70% of your gross margin coming from around 20% of your customers. Reality won’t mirror those numbers exactly, but some version of Pareto will apply to your business.
I like to use what I call the Pareto revenue focus principle, which breaks your customer transactions into three groups:
- Profit Engines
- Revenue Stability
- Drag Layer
Let’s knock out some quick definitions. Profit Engines are your most favorable group: the customer transactions that make up roughly 70 to 80% of your gross margin while representing only 20 to 30% of your customer base. They’re the sweetest fruit, and they’re also the hardest to come by. That’s why you also need a heavy mix of Revenue Stability customers, the transactions that bring you the bulk of your revenue but usually at middle margins. They won’t make you rich, but you need them to keep the lights on. And then there’s the Drag Layer: the folks who cost more to acquire, spend less, and ultimately do not move the needle.
Making the matrix actionable
Back to that product mix versus customers point from earlier. You can apply the Pareto revenue focus principle in any of these ways:
- Product mix
- Segments and personas
- Segments and personas combined with product mix
If you’ve gone through a segmentation exercise, apply it to your customer segments. If you haven’t, you can still apply it to transactions that represent different product mixes. And a third way is to combine your best prospects with the transactions they actually engage in.
So what is the value of all this? Now you know what you’re going after: a healthy mix of Profit Engines and Revenue Stability. Once you know the target, you can make marketing decisions that attract those two groups.
Where this shows up in your marketing
Once you know the mix, you can apply it to the decisions you make every day in marketing:
- Limited-time product promotions
- Geo-targeting decisions
- In-ad headlines and verbiage
- On-site headlines and taglines
- Channel decisions, like which TV, radio, or websites to advertise on
- Case study development
- SEO
- Social media content campaigns
- Internal strategy and brainstorming sessions
- Marketing budget meetings
- Campaign attribution analysis
- Mid-term and long-term product planning
Interested in learning more? Ambient Array can read your CRM transaction and customer databases, build a model that identifies these groupings for you, and lay out an action plan to go after the right ones for a much bigger marketing lift. Let’s talk about where your profit really comes from.