Keys for designing Profitable Acquisition and Selective Prospecting Strategies.

Abstract:

• The great majority of companies are immersed in indiscriminate, mass obtainment tactics of a short-term nature.
• The challenge is not to obtain customers at any price, but rather acquire them intelligently by using targeting strategies that allow us to know who is joining our portfolio, what they are able to offer us, how long they might stay with us, and what they can generate during that time.
• The principal objective of every Obtainment Strategy must be profitability, defining how much to invest in each segment of potential customers, what channels to use, and what sales and Marketing resources.
• In order to obtain customers intelligently and profitably, companies must establish Selective Obtainment Plans in which the focus is on each segment’s value.
• Alongside Obtainment Strategies, there must be Re-activation Strategies that “wake up” inactive customers and allow us to “re-obtain” them.
•  Every Obtainment Strategy must be joined by proper Channel and Retention Strategies that seek the optimization of resources and maximum profitability.

Every company enjoys communicating their increases in new customers. Obtainment figures and increase in market share always figure among the most prominent aspects in any company’s annual statement. Incorporating new customers into the portfolio in a hyper-competitive market, in which acquiring new accounts or new consumers almost always means taking them away from the competition, is always good news. And that’s true. New customer acquisition is a symptom of good business health, since no company grows healthily without regularly increasing its market share. However, precisely because new customer acquisition is the vital engine for business growth, intelligently managing obtainment is a complex challenge.

Because the unanimous orders in every company are to sell more and steal customers from the competition, the great majority of companies are immersed in indiscriminate, mass obtainment tactics of a short-term nature, which focus more on volume than on value; on quantity rather than quality. And these actions, taken outside the framework of correctly designed strategies, can clearly affect any company’s profitability in the long-term.

Obtainment at any price?

The true challenge, then, is not to obtain customers at any price, but rather acquire them wisely, knowing who is joining our portfolio, what they are capable of offering us, how long they might stay with us and what they can generate during that time, how much to invest in obtainment strategies, what resources to rely on, and what channels to use. Customer obtainment must not be a term that stands alone; rather, it should always be accompanied by the adjective “profitable”.

There are several reports that show that companies that have slowed their rhythm and investments in customer obtainment have nevertheless been able to increase profitability and profits. This is the case for a well-known insurance company in the United States that, aware of the fact that its obtainment costs were above average for its market, asked its agents to grade the probability of acquiring each new policy according to specific factors. If it was below a certain level, the instructions were to abandon the process. Paradoxically, the company saw a decrease in sales, but a clear increase in its profitability ratios and its Customer Equity.

This is a clear example of how many customer obtainment strategies do not count profitability as an essential element, as an increasing number of studies are showing.

Targeting: What customers to obtain?

As basic as this seems, it is a required question for all companies determined to opt for intelligent and profitable new customer obtainment strategies. Because these strategies are constant – companies are always obtaining customers -, it is difficult for companies to stop and ask whether or not they are doing it correctly, and what type of customer should be sought after above all others… The lack of time and the need to show permanently growing figures, quarter after quarter, cause this question to be asked less often than necessary. But rapid market changes require it.

Knowing what customers are the most beneficial to acquire, in decreasing order, is vital to basing the entire obtainment strategy on this “targeting”. Obtaining any customer indiscriminately without prioritizing can cause the “acquisition rate” to go up for a time, but the day will inevitably come when profitability begins to decrease. The only answer to counter this threat is customer value. Every company must establish its own value “drivers”. While some can be generalized, every company must know who those customers are whose acquisition will not only increase short-term market share, but also raise the company’s profitability and profits in the long-term.

It is very common for the segmentation schemes used in “targeting” strategies to be governed by four guidelines, centered on the traditional matrix: A- customers who are easy to obtain and retain; B- customers who are easy to obtain, but difficult to retain; C- customers who are difficult to obtain, but easy to retain, and D- customers who are difficult to obtain and retain. Every company will assign its own internal qualifications to each segment, but this model is extremely common. It is equally as common for almost all companies to focus their efforts on the “easy” customers: both those who are easy to obtain and retain, and those who are easy to retain, although difficult to acquire. The rest remain in the background. Big mistake.

The prestigious Professors Reinartz, Thomas and Kumar, analyzing the mechanics of a well-known American retail company’s obtainment strategies for three years, recently showed that “ease” of obtainment is not always synonymous with “profitability”. In fact, the opposite is true. The meticulous study of the customers obtained over the last three years showed (see graph) that the customers who were easy to obtain and retain represented 32% of the recent portfolio, but they generated 20% of profits; the customers who were easy to obtain but difficult to retain made up 25% of the portfolio, but they only generated 15% of profits; the customers who were difficult to obtain but easy to retain represented 15% of the portfolio, but brought 40% of profits, while those customers difficult to obtain and retain made up only 28% of the portfolio, but generated 25% of the company’s profits. Conclusion: if the company persisted in focusing on acquiring the “easy” segments (A & B), the profitability of its obtainment strategies would quickly be affected. Companies of this type not only do not optimize profitability, but they also incorrectly assign their resources.

Selective Obtainment Plans

Sometimes other strategies are used, base don Selective Obtainment Plans with the principal objective of profitability by means of acquiring customers according to their value for the company, and of course, using proper resource assignment based on that value. A meticulous knowledge of the competition, of the current obtainment strategies’ performance, and above all, of the potential market, will allow us to design Selective Obtainment Plans with clearly-defined “targeting”, the customer segments of greater or lesser value to obtain, as well as the sales and Marketing resources and the channels that must be assigned to each segment.

If a bank sells 1,000 mortgages per month through its office network and another 1,000 through its sales reps, and the acquisition cost of the office network is 30% more than that of its sales reps, it could seem that obtainment is more economically efficient through the reps than through the offices. But this deduction doesn’t make the least bit of sense if the company has an in-depth knowledge of the value and potential lifespan of the customers obtained through each channel. The “lifetime value” must be the focus on which Selective Obtainment Plans are based.

The focus underlying Selective Obtainment Plans is an effective assignment of resources to the acquisition of customers, or what the abovementioned Professors define as ARPRO (“Allocating Resources for Profit”). This model takes into account not only the priority segments to obtain, but also its long-term profitability based on value.

Resource and Channel Assignment

Once “targeting” has defined how to selectively obtain customers based on their value for the company, we face the tricky task of deciding how much to invest in obtainment for each segment; that is, what sales and Marketing resources are assigned to each segment to be obtained.

In order to develop Assignment Strategies, it is advisable to analyze beforehand how much is currently being invested in each sales channel and how many customers have been obtained by that channel. This analysis will give us an idea of the company’s degree of accuracy. The challenge is more complicated when dealing with companies geared towards the final consumer, with thousands or millions of portfolio customers. In fact, many of them opt to directly consult the customer about the channel that led them to the company, in order to measure the effectiveness of its sales channels and Marketing actions.

Resource and Channel Assignment Strategies meant to obtain customers must be constantly re-invented, since it is inevitable that the more the potential market opens the less profitability we obtain in customer acquisition. Every company starts out by first approaching its customers of highest potential value, and then “going down the totem pole” step by step. It is clearly more profitable to knock on 100 doors with high purchase potential, than it is to call on the next 5,000 customers with a lesser probability. The profitability of obtainment actions decreases almost proportionally to customer potential.

New Obtainment Strategies

On the other hand, the efficiency of traditional advertising and direct Marketing campaigns is clearly in question – according to Daemon Quest data, the average consumer is exposed to an average of between 3,500 and 5,000 advertisements per day, and closet o 60% of the public says they feel “bombarded” by Marketing and advertising actions-, which is why new channels for customer acquisition are being imposed. In an environment in which brands such as Google, Zara, and Harley Davidson scarcely use traditional actions to obtain customers, and clearly benefit from “word of mouth” and other communication and public relations strategies, it is becoming obligatory to use imaginative customer acquisition models based on, for example, recommendation.

One of the principal Internet access providers in Spain (ISP) has multiplied its new customers by ten in only three years thanks to an imaginative Affiliation Strategy. The company realized that its main prescribers were “webmasters”. These companies or self-employed webmasters are not usually limited to designing other companies’ sites, but they also recommend to their customers where to place their servers and who to call for maintenance of its networks and connectivity. So, this company designated almost its entire obtainment budget to commissions for webmaster for each customer they sent to the company. This peculiar “sales force” is currently made up of more than 700 “sales reps”, to whom the company gives occasional updates and training on its new products, and to whom they offer almost free services.

Re-activating the “sleepers”

This imaginative way of optimizing internal resources to obtain customers profitably and intelligently is proof that before jumping into the ambitious conquest of a potential market that is not always known in-depth, it is advisable to carefully observe what happens “at home”. How many inactive customers does a company with thousands of portfolio customers have? The answer in the best cases is a high percentage, and in the worst cases, it’s “Don’t know / No answer”.

Re-activating an existing customer is up to seven times lest costly than obtaining a new one, as internal Daemon Quest studies show. Detecting that group of sleeping customers, knowing their profile, properly segmenting them, and offering them the exact “hook” that re-animates their relationship with us is a strategy that must work alongside obtainment actions. Discounts, subscription to loyalty programs, sales, etc., are some of the actions to take in order to “re-obtain” those inactive portfolio customers. American Airlines, for example, realized that many of its customers used its flights for transatlantic itineraries, but they did not use its services to travel within Europe once they landed on the Old Continent. It launched a discount and benefits program for these transatlantic “frequent flyers”, and optimized its intra-European routes by 15%.

Obtainment, Profitability, Customer Value, Potential Lifespan, and Channel and Retention Optimization are strategies that must constantly be at hand. Many companies decide to use them separately, convinced that the important thing is for the “fish to enter the net”, and that there will be time later to get to know them, retain them, and make them grow. This vision is as mistaken as it is reductionist. It’s not just about “getting the big fish”; companies also thrive on the “small fish”. Obtaining customers profitably and intelligently is essentially about knowing how much “each fish is worth”, how much it might be worth in the future and, consequently, what means to use in order to catch each one and keep them “in the net”. Only in this way will each and every “fish” be profitable.