Articles
ACR TODAY: Role of Profit in Marketing
It is an undeniable statement that profit comes from customers, which are a company´s greatest asset. Marketing manages the interface between an organisation and its customers. Knowing your customer and getting close to them generates profits. A key element in the generation of profit through marketing, is a profound understanding of the market place and, in particular how customers are to be segmented and then selected. There is a famous saying that all customers within segments are equal
, but some customers are more equal than others. Let me give you an example;
In 1995 only 95% of banks measured individual customer profitability, however, 65% of customers lose the bank´s money.
Another case in point is that analysis was done of a cruise company´s customer base and, it was found that a few customers had spent as long as 10 years on board the company´s liners in total. They were talking to these people in exactly the same way as customers who had spent one week travelling with them. Does that really make sense?
The point being made here is that however we segment our customer groups, (in the latter case frequency of use was a potential customer segment), we need to understand how our customers differ.
A typical process for segmentation of a market is given below;
Not all customers in broadly defined markets have the same needs. Positioning the products is relatively easy, but market segmentation is more difficult. Companies need to select a segment and serve it and not straddle segments and sit between them. You need to understand;
-
How your market works
-
List what is being bought, including when, where, how and applications
-
List who buys (demographic)
-
List why they buy (needs, benefits, sort)
-
Search for groups with similar needs
This is the simple step by step approach to identifying profitable industrial market segments.
Having identified the market segment, there needs to be an evaluation for the strategy of each segment. In understanding our market, we need to know how profitable our customers are. Not the profitability of our products, which has been the traditional approach for many companies. Few organisations even today really understand their customer profitability and, where the potential for profit growth really exists amongst their customer base. Customers need to be graded in terms of their profit potential and as a result, the strategy to be adopted will differ depending upon the potential, eg. a high profit potential customer requires a level of investment, which is a company that is generating significant profits in relation to its potential. The message clearly is, do not treat all your customers the same.
Below is a strategic tool used to identify how customers can be categorised, relating the segment attractiveness, to a company´s business strengths.
To maximise profitability we need to maximise our customers profit potential. This means identifying the appropriate strategy for a customer segment as indicated in Chart 2.
The message to drive home here is that successful companies focus on customers not products. The right strategy comes from maximising customer not product profitability. This can lead us into conflict with our accountancy colleagues, but in which case, we need to educate them, not give into them, because at the end of the day it is not accountancy procedures that should drive a business, but Marketing for Profit
.
