If possible, a business should position itself to dominate its market.
Very few businesses have the resources to dominate in the general marketplace. In most cases, competing against Coca Cola, Procter and Gamble or Walmart is a losing proposition. These companies have huge war chests to spend and brands that are well established in most consumers’ minds.
One of the reasons tech companies initially work with venture capitalists and eventually go public is to amass the funds to establish themselves in the marketplace by investing in research and development and marketing.
When Amazon was getting started, Jeff Bezos cautioned investors not to expect short-term profits. Amazon was developing the technology to create its own storefront as a “toll booth” for other companies (not to mention ancillary services like cloud hosting) and investing in developing a customer list. Now Amazon is one of the “500 pound gorillas” of the internet.
Most small businesses don’t have these resources.
Instead of competing in the ocean, redefine your marketplace as a small pond, hopefully stocked with big fish. This is usually done by defining a special niche where you can target your marketing dollars.
How much you can or should invest in marketing is primarily a numbers game. Instead of thinking “how can we minimize marketing costs?”, think “what marketing costs are necessary to dominate our market or to generate a desired level of profitability?” In other words, whoever can spend the most to get a customer while remaining profitable wins!
This requires a long-term mindset and adequate financing. Sometimes companies can “start on a shoestring” and fund their marketing with reinvested profits from sales.
The key number you need to find out or estimate to determine your marketing budget is The Lifetime Value Of A Customer (Client/Patient.) Another way to say this is, “What is a customer worth to you?”
The Lifetime Value Of A Customer is the present value of expected future receipts for an average customer. (In some cases, you can “silo” different groups of customers to find out the lifetime value for each group.)
Most companies operate as if the purpose of getting a customer is to make a sale. In direct marketing, we believe the purpose of making a sale is to get a customer. We are building relationships with long-term returns.
That’s why many direct marketing companies have initial offers where they obviously lose money. For example, the Columbia LP Record Club used to offer a choice of six LP records for $1. The company knew that customers who joined would continue to buy records offered each month for months or years.
The Lifetime Value Of A Customer is the maximum you can spend to get a customer.
To get dominant positioning over competitors, you need to be willing and able to spend more to get customers than they can.
How can you increase the Lifetime Value Of A Customer to get this positioning?
First, are you serving an affluent group that is willing and able to pay premium prices for a premium or luxury product or service?
Second, can you establish more value for what you offer so your customers are willing to pay premium prices for it? Can you establish yourself as a preferred provider/expert?
Third, does your offering lend itself to continuous use into the future? (Examples include general practitioner doctors, dentists, tax return preparers, some specialist doctors, acne medications, laundry detergent, continuity/subscription products and services, mortgage refinance monitoring, etc.)
Fourth, are there additional “back end” products and services that you can offer? For example, barber shops and beauty salons offer hair and skin care products. Legal, accounting, financial planning, and financial services are being combined into one company or affiliated companies.
An advantage of direct response marketing is it’s designed to be able to measure the cost of getting customers and return on investment for each campaign segment.
Going through this process will help you work on your business so that your business will work more effectively for you and your family.
If we can be of service to help you in this effort, please email Michael Gray, firstname.lastname@example.org.
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