Why You Are Reading This Article
You are probably reading this article about Marketing Strategies for Small Businesses because you want to increase your profit for your own small business. Notice that I did not say revenue or client base. Those two are stepping stones to an increase in profit, but do not necessarily deliver that increase. In other words, you can increase your client base and actually lose profitability. How could that be? When your new clients are making fewer monthly purchases than your previous client base, the profit per customer drops. Your total profit may increase, but so does your cost of administration for these clients and the additional production load and support. What? If you are scratching your head, here is a simplified breakdown:
Your product (or service) sells for $9.50 and your profit margin is %10 or $0.95 and you have a client base of 1500 people who make 2000 purchases each month between them. That results in $1900 monthly profit.
Let us say you increase your client base to 3000, who make 3000 purchases per month and you have to hire someone else to help service the extra 1500 people and manage the extra 1000 items or service calls, depending on which you provide. Compare the total profit to how much profit is earned per client? That comparison is the key factor that will drive the strategy.
In this case, the increase in your client base decreases the profit per client and it represents a 25% decrease in profit per client, while there is an overall increase of $950, or 50% in profit. The total increase mesmerizes small business owners. Rather, they should look at the profitability on average per client. We have not even calculated in the additional costs of administration, production, support, and management. This can be contrasted with the cost to acquire that customer and the cost of maintenance per client. You need to get to the real value per client, not the total value before costs. Remember the basics, that profit is after costs are subtracted. Also, you should be planning to recover your costs and earn the profit you plan within no later than the first year after they are acquired.
In the case we have presented, you can guess that it will cost more per client after the increase, than before, and the profit per client has already dropped. From this example we will address Marketing Strategies for Small Businesses.
Marketing Strategies for Small Businesses
There are obvious questions that arise from the scenario described, especially concerning Marketing Strategies for Small Businesses. Here are some off the top of my head:
- How can we increase our client base with more profitable clients and keep our profit per client high?
- How can we manage the cost of scalability?
- Are there alternative business models we might apply to prevent or at least mitigate this kind of scenario?
Marketing Strategies for Small Businesses is mostly about appealing to the right people to convince them to do things (CTA’s) that lead to a purchase. There are CTA’s post-sales that you should want them to do too.
Who to Appeal To
Current Base of Customers
When you make this kind of appeal you will not gain new clients. Your goal in this case is to sell more products and services to your existing client base.
More of the Current Type of Customers
With this appeal you are reaching out to capture more customers that match the profile of your current clients. So you are working harder to sell more products and services, because you have to do it to people who have no commitment to your brand yet. This may not be the most efficient demographics, but it is the most familiar for you to work with. It means you are most likely to create messages that resonate with them in your marketing campaigns. Facebook has a feature in their business tools called Lookalike Audiences that allows you to target ads at more of the current type of customers.
New Types of Customers
With this appeal you are reaching out to clients who match a demographic profile other than the one you are used to working with. You are diversifying your client base. While this can protect you in the long run, it can be done quite blindly. Again, this may not be the demographics your choose may not be the most profitable ones without some kind of research involved.
Most Profitable Type of Customers
Of course, when I mention this category everyone agrees that this is the type of customers they want more than any other. But the immediate question, regarding Marketing Strategies for Small Businesses, is how to determine which demographic will be the most profitable for their particular business. How can you determine the profitability of a client based on their demographic profile? This is a topic for another article, but note that you must take this step.
3 Questions from this Scenario
How to Increase Your Profitable Clients
Higher Income Bracket
When business owners are asked this question in the context of Marketing Strategies for Small Businesses they usually assume that finding clients in a higher income bracket will translate to clients who buy more products or services. As with most issues in business the problem is a multivariate one.
More importantly than additional income the client must have expendable income. The more expendable income a client has, the more products they can buy.
Desire for Your Products
They still may not choose to spend that expendable income on your products. So there must be a desire for your product, either through need or want.
In addition to their desire, you must consider the authority factor. Is there another person involved in the decision making process about where this expendable income is spent? The fewer people involved in making this decision, the easier it will be to convince them to spend that extra money on your products. Any experienced sales professional will tell you that when there is a spouse involved in the decision making process they will always oppose the enthusiasm of their partner. And you must understand why they do it, even if it is instinctively. They want to balance that enthusiasm in order to protect the family finances from foolish spending. If you can find clients who are the sole authority over their financial decisions, then you will have fewer obstacles to closing the deal.
The Marketing Strategies for Small Businesses is starting to take shape here. So there are three main variables in figuring out how to increase your profitable clients:
- More expendable income
- Desire to buy more of your products and services
- Fewer people involved in the authority of deciding how the expendable income is spent
How to Manage the Cost of Scalability
Let us start by referring to a recent report released 25 April 2018 by Barclays for Entrepreneurs On the Future of Business Scale-ups in the UK. Do not worry that the report is about the UK. There is much to learn from it about Marketing Strategies for Small Businesses even if you are an American. Even Forbes tries to distill it in Six Steps to Scaling a Business, though Philip Salter misses one or two points, substituting instead what he thinks should be there. The points made by Cambridge Judge Business School in this report, that are critical for the entrepreneur to focus on first, regarding scalability, are:
- Start-ups must have a will to grow and commit to ambitious growth
- Build a strong and broad team, through top management skills
- Identify core competencies
When your business begins to make a profit and you are deciding what to do with that profit, it is easy to be tempted to spend it on satisfying things that reward and further promote motivation to make more money. However, the money itself should be the motivating factor, and it is so with the most successful entrepreneurs. When you have that will to grow and are committed to an ambitious growth scheme, you re-invest profits into the growth of your business without flinching.
The results of this commitment show in the application of the profits to the second and third points above. You will spend profits on building a strong and broad team and you will invest in your core competencies. If your spending is made on anything else then you are not managing the cost of scalability. So then, apply this test to every expenditure in order to impose this control and scale quickly and efficiently toward greater profitability.
Mitigation Through Business Models
Mitigating the loss of profitability of clients is a serious issue that should not be swept under the carpet. Some small business owners think that if they just work harder or target a greater number of clients this will compensate for the inefficiency. It never does. They learn this only too late, when their late nights and sacrificed weekends have devastated their reputations with their spouse and kids. Then the small business owner stands over the destruction of their own private lives that were sacrificed at their stubborn ignorance. Do not venture down that path! Heed the warning issued here.
To mitigate this kind of inefficiency you can employ various models. For a primer on business models and their effectiveness at transforming industries read this Harvard Business Review article The Transformative Business Model and New Business Models in Emerging Markets as well. In the first article, Stelios Kavadias, Kostas Ladas, and Christoph Loch define a business model quite well:
Definitions of “business model” vary, but most people would agree that it describes how a company creates and captures value. The features of the model define the customer value proposition and the pricing mechanism, indicate how the company will organize itself and whom it will partner with to produce value, and specify how it will structure its supply chain. Basically, a business model is a system whose various features interact, often in complex ways, to determine the company’s success.
How does this help us with our problem regarding Marketing Strategies for Small Businesses? Our goal is to increase the amount of spending per customer per period (i.e. month). A business model is a description of a process. Specifically, it describes how the business creates value and how it captures value. In our hypothetical example there is value being created and some customers are reaching our targeted value capture per client per month. However, many are not. What will cause more customers to reach that target level?
- Finding different customers who are more profitable for you? (we addressed that already, above)
- Communicating the value of your offer better or more often?
- Making your offer more urgent?
- Changing your pricing either up or down to optimize the customers’ perceptions of value?
- Higher availability of your product or service?
- More convenient delivery of your product or service?
This list includes ways to adjust our business model and mitigate the loss of profitability of clients.
Conclusion on Marketing Strategies for Small Businesses
We can easily have our business fall into the problematic situation where we have increased our client base, but we are spending more on costs due to a dramatic lowering of profitability per customer. In the search for better Marketing Strategies for Small Businesses we found that targeting the most profitable type of customer for our product will yield the best results, but only if we pay attention to other tactics to form a unified strategy.
Increasing the profitability from your clients means identifying clients with higher incomes, more expendable incomes, a greater desire for your products, and with fewer decision makers in the process.
We then turned our focus to how we should manage the cost of scalability. Our conclusion there is that we should re-invest as much of our profits as possible, but control where they are going. They should go into two areas
- Build a strong and broad team, through top management skills
- Identify core competencies
This way we are optimizing our profits to empower our growth, but to create a strong team and to build a strong core to our offerings.
Lastly, we looked at how altering our business model can mitigate the loss of profitability of clients. The list we came up with helps us to capture more value per customer per period.
When we put all of this together we create a solid marketing strategy for our small business. Our clients are happy and we are happier, because we have optimized our earnings from the labor of our business.
Addendum to Marketing Strategies for Small Businesses
Misuse of Numbers in Marketing Strategies for Small Businesses
Here is a slight of hand used in one article that can fool most people, since the focus power used in reading on the Internet is rather shallow.
Start by looking at your churn rate – the number of people who cancel their subscription in any given month. If you have 1,000 customers and every month 20 of them cancel, that works out to two per cent monthly churn. By simply inverting this value ( 1 / Monthly Churn ), you can calculate how many months on average your customers will stick around. At a 2% monthly churn, that works out to 50 months. (From the article Customer Lifetime Value to Customer Acquisition Ratio (CLV:CAC) )
Their trick is the suggestion that the division of the total customers by the customers canceling monthly will tell you how long a customer is likely to stay. So they suggest. There is no correlation whatsoever between total customers, churn rate, and how long a customer will stick around. What have they really calculated in this case? They have calculated how long before they lose all of their customers, assuming they acquire no new customers in those 50 months. This IS related to the churn rate, but it is an unrealistic scenario. If you are not gaining new customers in 50 months you deserve to go out of business. This is not useful at all as a metric and unless you are not acquiring new customer, should be ignored. It is background noise and unimportant.