I like working with business owners as you are doing what you are doing because you want to work for yourselves. So it worries me that most people are working really hard for someone else. Because we all have customers that aren't worth having. Yet few of us realise who they are. Because of the three big myths of profitability. So I think that we need to discuss them.
So when we have discussed the three myths of profitability, you will have a clearer picture of what your customers mean to you.
Let's put in a check point here that we can refer back to. Think who are your three best customers and write them down.
Now the myths:
Number 1. The more you sell, the more you make
Lots of people try to tell you how to get more revenue... and they say increase your profit. But will it?
Even if it does, it takes the average British company £26 of revenue to earn £1 in profit. Which means it takes a £100 m company a snap of the fingers, but a £100 thousand company over half an hour.
So it's pretty hard work.
The simple fact is that more revenue doesn't automatically lead to more profit. After all what are some quick ways to sell more?
|
1.
|
Run a marketing campaign - cost money and we are never sure of who we will get.
|
|
1.
|
Or offer discounts, incentives or whatever. Fine, you sell more but are you making more? Ultimately everything gets cheaper and more competitive . In Asia 51% of manufacturers dropped prices last year and 23% raised them. It's not a sustainable advantage.
|
|
1.
|
Or find big customers. They expect superior treatment, better prices and many other treats, Big often means less profitable.
|
At the end you might be worse off. I had one project where the client thought that the product was bouncing around breaking even: marketing told them that if they doubled sales there would be lots of profit. I studied the situation, found that they were losing £40 million right now and that all selling twice as much would achieve was losing £80 million. They didn't understand the real cost of what they were doing.
Anyway, if you are selling yourself, you are already working all the hours God sends, so is selling more an option?
We need to find a way to make more profit without working any harder. Why work for someone else?
Number 2. Satisfaction and loyalty means profit
The claim is that satisfied customers mean loyal customers which means customer retention and so lower costs.
Yet there is no proven rule between satisfaction and loyalty, let alone anything to do with profit.
What evidence have I got?
|
„
|
Manchester Business School has found that satisfied customers are 65% loyal but the very satisfied are 95% loyal. Sounds good.
|
|
„
|
Against this American automobile manufacturers typically have satisfaction survey results of close to 90%, but repurchase rates of 30% to 40%.
|
|
„
|
And then some customers of big software companies are very dissatisfied but very loyal as they can't get off.
|
So how can we say that there is a relationship between satisfaction and loyalty? Even if we could, what makes a satisfied customer? Customers who are taking lots more value from you than they are giving you. This is not a recipe for success.
I'm not saying that having satisfied customers is bad. What I am saying is that pursuing satisfaction as your core objective is a doomed strategy.
