By James Adams
I’m sure it is a conversation you have probably heard a thousand times, how do we find new customers, or; we need to grow our top line revenue? So we need more customers. While for some industries you may well need new customers because you have exhausted your existing customer base, I am thinking big one-off purchases such as house sales, or fledgling businesses with a narrow product range that you just don’t have the customer base to leverage. Most businesses don’t need new customers. They just need to sell more of their products to existing customers.
The reason for this is simple, it’s about risk and reward. In business, we are generally looking to minimize or mitigate risk. Attracting new customers is, by its very nature, more risky and more costly than leveraging the relationships you have with existing customers.
This isn’t a new concept, in fact the Ansoff matrix, named after Russian Physician and Mathematician Igor Ansoff, was first published in 1957. It outlines the common market conditions and terminology for the possible mixes of customer and products both new and old and overlays the increasing risk of moving away from existing areas of competency. As a model it is easy to understand, which is in my opinion why its lasted so well, but what it conveys with all certainty is, what we should all now. Selling more of our existing products, to our existing customers, also known as market penetration, is the least risky go to market strategy in our arsenal.
Customers Are Buying All They Want from Us
I have heard this a few times in my career, and I understand where it comes from. You would think if a customer knows about our business, they must know about our products and trust us enough to buy all we supply and they want. After all, we have converted them to trust our business and part with their hard earn money once.
Great businesses understand the value of market penetration and take steps to positively reconvert their existing customers again, and again, and again. The key to this is segmentation, grouping like customers together and understanding what your value proposition to them is across product lines.
Keeping price equal (in fact, keeping all other things equal, known in economic circles as the state of Ceteris Paribus), map in your financials what a 3% increase in revenues does to metrics found within. The beauty of this methodology is all fixed costs remain equal and so should your SG&A, dropping the vast majority straight to the bottom line.
Segmenting Customers and Products by Type
While of course the market nuances are individual for each business, generally this segmentation process itself is the same. To understand where we are going tomorrow, we have to have a full view of where we are today. The simplest way to grasp this is to pull your last three years sales data, then cut it into segments of customer types.
How do they buy, how do they pay, how do they talk, what is the purchasing behavior, when is the reorder points. All of these can be used to create customer segments. Cut this again and in a couple of different ways, and double check buying behaviors across the business, does everyone agree? This is so truly foundational, the more input you can get and agreement you can garner will support in ensuring this segmentation is right for today.
You can then overlay portfolio buying behavior, are all segments buying the same products, are there any glaring gaps in portfolio uptake by segment? Begin this analysis with the mile wide, inch deep approach, assessing exactly how the landscape is on a macro level. Use this approach to develop messaging to segments across product lines. Take into account customer feedback and adjust your messaging as appropriate to leverage relationships to increase portfolio uptake. You may well be surprised how a slight change in your value proposition of an existing product to an existing segment, may result in a change of pace of sales.
Once this foundational detail is in place, you can switch the focus to inch wide and mile deep. Looking at the granular detail within each segment. Which customers aren’t performing in the same manner as others? How can we gain that 1-2% of sales from those existing customers.
Of course, there is a time within business when we have the opportunity to take on new customers, or expand into new products. What the Ansoff Matrix helps us to conceptualize, is that the closer we can keep to our existing customers or existing product lines when doing so, the risk we attribute to doing so is reduced. It also helps me, to explain just how risky diversification can be for a business, where we are entering a whole new market, with all new customers. Which when we speak about it in those terms, really presses home the reality of just how risky it can be.
In a global market of competition, we are always looking for that 1-2% improvement, which sometimes, might just be right under our nose.