When it comes to pricing your products and services, there are many ways to go about it, two of the most common pricing methods used are cost-plus pricing and contribution margin-based pricing, but if you check the list below, there are many more options open to you. We will go through a long list of them in this article.
Contribution margin-based pricing
Marginal cost pricing
Odd value pricing or Psychological pricing
Skimming (unique product/service and sell at high price),
Captive product pricing
Optional product pricing
Product Line Pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. This method although simple has two flaws; it takes no account of demand and there is no way of determining if potential customers will purchase the product at the calculated price.
Price = Cost of Production + Margin of Profit.
Absorption pricing is a method of pricing in which all costs are recovered. The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs. It is a form of cost-plus pricing.
Contribution margin-based pricing
Contribution margin-based pricing maximizes the amount of profit derived from an individual product, and is based on the margin between the product’s price and its variable costs, otherwise known as the contribution margin per unit. To calculate the figure you have to assume how many units of the product you are likely to sell at that price. There is an assumption to be made regarding the relationship between the product’s price and the number of units that can be sold at that price. The product’s contribution to the firms total profit (i.e., to operating income) is maximized when a price is chosen that maximizes the following: (contribution margin per unit) X (number of units sold).
Premium Pricing is used where there exists a uniqueness regarding the product or service and where a substantial competitive advance exists. Premium pricing is used by such luxury brands as Savoy Hotels, Rolls Royce and Prada.
Competition-based pricing comes about when setting the price based upon prices of the similar competitor products. Competitive pricing is based on three types of competitive product:
Products which have a lasting distinctiveness from competitor’s product. Here we can assume
The product has low price elasticity.
The product has low cross elasticity.
The demand of the product will rise.
Products have perishable distinctiveness from competitor’s product, assuming the product features are medium distinctiveness.
Products have little distinctiveness from competitor’s product. assuming that:
The product has high price elasticity.
The product has some cross elasticity.
No expectation that demand of the product will rise.
Marginal cost pricing
Marginal cost pricing is the practice of setting the price of a product equal to the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labour. This is often done by businesses during periods of poor sales. If, for example, an item has a marginal cost of £10 and a normal selling price is £20, the firm selling the item might wish to lower the price to £11 if demand is slow. The business would choose this approach because the incremental profit of £1 from the transaction is better than nothing at all.
Predatory pricing is an aggressive pricing strategy intended to drive competitors out of a market. It is illegal in some places.
Odd value or Psychological pricing
Psychological Pricing is used when the business wants consumers to respond on an emotional, rather than rational basis. For example selling for £9.99 instead of £10, this is evident in most supermarkets and retail outlets.
Dynamic pricing is a flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies. By responding to market fluctuations or large amounts of data gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases – dynamic pricing allows online companies to adjust the prices of identical goods to correspond to a customer’s willingness to pay. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.
Dynamic Pricing has a number of variants such as:
Yield Management – depends on inventory and time of purchase. i.e. hotel rooms or airline seats.
Real time Market – based on supply and demand.
Skimming is selling a unique product or service at a high price, and sacrificing high sales in preference to high profits, therefore ‘skimming’ the market. Usually employed to reimburse the cost of investment of the original research into the product – commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target “early adopters” of a product or service. These early adopters are relatively less price-sensitive because either their need for the product is more than others or they understand the value of the product better than others. This strategy is employed only for a limited duration to recover most of investment made to build the product. To gain further market share, a seller must use other pricing tactics such as economy or penetration. This method can come with some setbacks as it could leave the product at a high price to competitors.
Penetration pricing is the opposite of skimming, where a product is sold with a low price to gain market share.
Limit Pricing is the price set by a monopolist to discourage economic entry into a market, and is illegal in many countries. The limit price is the price that the entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average cost of production or just low enough to make entering not profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is usually larger than would be optimal for a monopolist, but might still produce higher economic profits than would be earned under perfect competition. The problem with limit pricing as strategic behavior is that once the entrant has entered the market, the quantity used as a threat to deter entry is no longer the incumbent firm’s best response. This means that for limit pricing to be an effective deterrent to entry, the threat must in some way be made credible. A way to achieve this is for the incumbent firm to constrain itself to produce a certain quantity whether entry occurs or not. An example of this would be if the firm signed a union contract to employ a certain (high) level of labour for a long period of time.
Loss Leader Pricing
Loss Leader pricing is illegal under EU and US Competition rules. Larger players in a market may use loss leaders as part of an overall pricing strategy, such as using it to draw customers into their establishment and encourage them to buy other products once there. Loss leadership can be similar to predatory pricing or cross subsidization; both seen as anti-competitive practices.
Target pricing is a pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like car manufacturers. Target pricing is not useful for companies whose capital investment is low because, according to this formula, the selling price will be understated. Also the target pricing method is not keyed to the demand for the product, and if the entire volume is not sold, a company might sustain an overall budgetary loss on the product.
Economy pricing include things like the no frills lines found in supermarkets.
Promotional Pricing is used to promote a product and is very commonly used. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free).
Captive product pricing
Captive product pricing is seen in cinemas when you are forced to buy refreshments from the foyer, or blades for razors, or ink cartridges for ink jet printers, where the ink is often more expensive then the initial printer cost.
Optional product pricing
Optional product pricing is seen when you buy an airline ticket and are charged extra for seat next to window, extra baggage or speedier check-in.
Product Line Pricing
Product Line Pricing is where there is a range of products or services and the pricing reflects the benefits of parts of the range. For example car washes. Basic wash could be £2, wash and wax £4, and the whole package £6.
Geographical Pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price.
Drip pricing is agreeing an initial price, with a customer only to add extra charges when the customer is about to buy. It works because once lured by the initial price and into a sense of ownership, a consumer attaches more value to the goods in question. This “endowment effect” makes them more likely to accept later charges as people hate the idea of losing £5 much more than they like the idea of gaining £5. Extra charges also only become apparent after the customer has invested time and effort, which they don’t want to waste, in the sales process. Anchoring helps here (“it doesn’t cost £200, it only costs £x” – £200 is the anchor). Make the pricing structure complex, create a sense of social approval – “everyone is buying” – then chuck in something free and its job done.
Price leadership is seen with regards to oligopic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, that the others soon following.
Value pricing is generally used when external factors such as recession and competition pressure sales. This focuses on prices you believe customers are willing to pay, based on benefits your business offers them. Companies try to increase profits and get the maximum value out of their scarcity and are interested in who is willing to pay more, rather than who can afford to pay more.
Imagine that you dealt with every customer as an individual, and knew exactly how much they valued any possible version of your offering and that the price charged to any customer remained unknown to all the others. Develop a pricing scheme which gets as close as possible to this ideal. There are some attempts to make use of this pricing system:
First degree price discrimination – seen as unfair and unpopular
Tactic used by car salesmen and estate agents
Supermarkets use discount cards which are needed to take advantage of sales prices
Money on – Amazon used to tailor prices based on customer profile using “cookies” to display different selling prices to different customers.
Group discrimination – more accepted form of price discrimination
OAP and student discounts
Discounts for local customers who purchase regularly
Self discrimination – getting customers to confess they are sensitive to price, while still taking advantage of those willing to pay a premium price
So there you have it, there are lots of pricing options open to you. Use a method that best suites you and your business circumstances. Cost-plus pricing and contribution margin-based pricing are the most commonly used methods historically although some form of price discrimination is the ideal in most instances, although is very difficult to implement effectively for smaller, less technically endowed businesses.
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Having run a number of businesses over the years I have come accustomed to dealing with the day to day challenges that come along and the reactionary style owners often adopt in dealing with them. One of the key challenges I have found is to remove myself from a state of “fire fighting” and into working on the business and not in it.
Working on a business involves some strategic (eyes glaze over) thinking and planning. As a business owner I am constantly looking to increase profit and in doing so must look three areas:
In this article I’m going to cover what is often considered the most boring of the three topics “reducing costs“, But saving money within your business is probably easier to achieve then increasing sales, where you need to spend more on advertising or communication with existing customers all of which will involve some form of expenditure, and increasing prices which can be a scary proposition, with research showing it causes much anxiety amongst entrepreneurs and business owners alike. Taking costs out of your business will directly impact the bottom line and increase profits, if done correctly.
There are two ways to reduce costs:
Reduce costs as percentage of sales. For example higher sales on the same costs or costs rising less than sales are rising
Simply cost cutting – However simply cutting costs is not always the answer as it may adversely impact sales and margins. If efficiency or output is reduced as a result of cutting costs than some analysis of the risks and rewards needs to be undertaken first.
5 step plan
Go through this 5 step plan in the sequence I have laid them out, this will prevent you feeling overwhelmed.
Eliminate waste and spare capacity. Use your time wisely, don’t waste hours and hours trying to save a few pounds.
Consider your position on a long term view versus a short term view. Set the level of investment spending where you want it to be.
Make sure your pricing is set correctly, failure to do this prevents you from knowing the potential of the business. (Check out my pricing strategy article here)
Understand your product offerings. what products haven’t been costed properly, what products aren’t valued by your customers but weigh heavily on costs. What parts of your business have moved away from your core activity and do these contribute sufficiently to profits
Strategic review. The business is the wrong shape. Going small and more niche or larger to cover cost base by pursuing better margin areas of your business.
Below is a list of other areas to consider:
One of the first things that businesses look to cut when making cost savings are with regards to employees, because generally employees are one of the biggest costs and biggest headaches (in an admin sense) for companies. This can be done a number of ways, by reducing staffing levels, introducing short time working, imposing salary freeze, and or reducing pension service costs. However taking this approach can cause an adverse effect on company morale, efficiency, staff absence and turnover levels and may cause issues with supplier relationships, where supplies reduce credit arrangements for fear of not getting paid by a company that is perceived to be struggling. Another way of dealing with such costs rather than simply cutting is to improve productivity.
Improving the productivity of employees is a more positive way of reducing costs per employee, and should involve the employees in the formulation of this process. If they are involved in the development process they will have ownership of it and will be more likely to follow through on initiatives. You don’t need to introduce productivity incentive bonuses to improve productivity, creating a happy working environment where employees are valued and feel they are contributing is beneficial for all.
If you’re increasing capacity, employ an extra shift before adding more space to increase output. This will make it easier if capacity drops again so that you’re not stuck with the cost of a long lease and under capacity.
Outsource all non-core tasks. If you do certain things infrequently look to get things off the books and done by a specialist on a freelance basis..
Supply chain management
Look for bulk purchase discounts, or source cheaper suppliers (but be wary of the risk of supplier failures or enforced single sourcing), reduce stock levels, cut excess production capacity in tougher times. Reduce inventory levels and move to a “just in time” supply or materials
Cut capacity, such as closing business units (stores, website etc),
Sale of business units, such as Clapham house selling Tootsies
Oversees shifts – moving operations to cheaper lower cost locations (be wary of weakening of control over quality)
Asset value write downs – (none cash write downs, cleanse the balance sheet and give clear picture of the trading position, setting a new base to build on. This is more of an accountancy issue rather than something that physically impacts the business.
The general rule of debt management is to pay off your debts, such as your mortgage, loans and credit card bills, before you start to save money. This is because the amount of savings income you can get is almost always dwarfed by interest rates you pay on your debts. To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.
Pay down debt levels to reduce debt service costs when surplus income cannot be utilized better through investment or purchase of assets.
If times are really desperate, consider a Company voluntary arrangement (CVA), which would release it from certain liabilities to its landlords.
14 Savings on Purchases
Don’t buy impulsively!
Do your research – do your research to find out when the industry is on the downside of the demand curve and buy, buy, buy.
Know about the secondary market – returns or refurbished
Understand that retailers are in business to make a profit on you – Retailers always have to move through product to make room for the next batch.
Don’t be an ‘early adopter’!
Don’t be afraid to ask for a discount
Buy during off-peak times
Don’t give in to the fashion trends
Always be ready to walk away.
Expose your purchase to competition – Squidbid.com is a Demand Driven marketplace which has developed a cool concept.
plan needs (no impulse buys)
shop for value
ask for discounts
examine receipts and bills
So there you have it, cutting costs doesn’t need to be boring. In fact saving costs is tax free, in many cases doesn’t require any capital and doesn’t rely on any marketing activities. It’s often the easiest way to put money back in your pocket so should be the first area of consideration when looking to increase profits. Check out the other two areas by clicking on the links below.
Anyone that’s running a business wants to make more profit. There are only two ways to do this:
Sell more goods and services (volume).
Make more profit per £1 of sale (margin) either by increasing prices or reducing costs or increasing prices while reducing costs.
For the purposes of this article we’re going to concentrate on the “Increase Prices” part of the model (above) in our quest to increase profit margins.
Many business owners are afraid to charge “more” for fear of losing custom and putting people off buying from them, but the flip side of this is you may be leaving money on the table that could be in your bank account rather than in the customer’s pocket. I once heard this sentence and it changed the way I thought about pricing, it goes “Unless you are the most expensive in your field you can always afford to put up your prices”.
Well not everyone is comfortable about increasing prices, and as business owners we should be wary about the way we edge them up. There are a number of tactics we can employ to ease price increases into our business
Introduce a new pricing structure for new customers only, look after your loyal customers, but let them know that you will honour the old price structure for as long as they stay with you. Should they leave and come back at a later date they will have to go on the new pricing model. Let them know you value their loyalty and are rewarding it, make it a good PR exercise.
Begin to shift your overall product sales mix towards higher profit margin products and services, and start phasing out your lower margin items. Introduce higher margin new products that are perceived as higher value solutions for customers.
Decrease the level of discounts you’re currently offering customers.
Increase your minimum order volumes so that customers have to reach a higher threshold before they qualify for discounts.
Increase your delivery charge and start charging for any additional special services related to delivery.
Charge your customers for any engineering and installation services that you previously included as standard.
Increase prices to cover for overtime or additional time needed to deliver rushed or very short notice orders.
Start collecting and charging interest on overdue accounts from the last few months.
Begin to write stiffer penalty clauses into all of your contracts. Think about it – your suppliers will almost certainly be doing this to you, so there’s no reason why you can’t be commercially more hard-nosed as well.
Find ways to decrease some of the physical features or characteristics of your product, but continue to charge the same prices.
Times are tough, but we have to make sure we are getting a fair price in exchange for our services/products. Make sure you’re maximising profits so that you can continue to provide for your customers in the years ahead.
If you have any additional ways you have increased prices please put them in the comments. Hope you found this post interesting please subscribe to my newsletter so that you get to hear about my newest content as soon as it’s published.
When I first started off in business, I found cash flow one of the harder things to get my head around. I figured as long as I had my prices right and was making a profit, I would be fine.
However cash flow is one of the most important aspects to a business, the lifeblood of it, in fact. Without good cash flow, your business is dead in the water, unless you have access to enough cash reserves or funding.
Cash Flow doesn’t mean “Cash”, as in paper money
Just something to bare in mind here, when we are using the term ‘cash’ we are not literally talking about cash-in-hand, as in paper money, but referring to money actually entering or leaving your bank account in whatever form either through electronic payments, cheques, or cash.
How cash flow impacts business
Below is a simple example of how cash flow impacts a business, and why careful consideration needs to be given to it, particularly when you are starting off and in periods of growth.
Cash flow projections
I have tried to keep the numbers very simple and constant for illustration purposes only, of course revenue and costs will vary from month to month in the real world especially for a business start up, usually building up over time. As we see in example 1, revenue of £10,000 is coming into the business each month, with costs for that period of £7000, this leaves the business trading at a profit of £3000 during each month. The business is profitable. If you want to imagine how this would work for a larger business, just add more zeros to the end of each of the figures in the table.
Now lets assume that the business is trading in exactly the same way in example 2 as it is in example 1 with just one big difference, revenue is not coming into the business during that particular month, but is being delayed a month. This wouldn’t be uncommon if you were a business dealing with other businesses where standard payment terms tend to be 30 days from date of invoice, and can even be as much as 90 days when dealing with some larger organisations.
The business is still trading at a profit technically from a profit and loss point of view. But from a cash flow basis, it doesn’t look as healthy as example 1. The revenue earned in month one is not actually coming into the business until sometime in month 2 which means that due to costs of £7000 in month one which had to be paid in month 1, there was a shortfall of £7000 in month 1. This would have to be paid otherwise you would have problems with your landlord, utility companies, suppliers etc. So you have to find £7000 in financing to cover the shortfall, maybe from the bank, maybe an overdraft facility or your savings or from friends and family.
Now when it comes to month 2 you are trading with revenue from month 1 coming in, the trading pattern of revenue, costs and profit is the same for month 2 in example 2 as it was for example 1, but because you had a shortfall in month 1 of £7000 you are able to put £3000 of your profit into paying off some of this, but it still leaves you £4000 down overall (see the accumulated profit row above). In fact it takes to month 4 to pay all of the initial £7000 deficit in full.
Now this doesn’t necessarily cause your business a problem as long as you have prepared for it, which is why as part of doing a business plan you should do a cash flow statement which tries to predict how money comes in and out of the business during each month. It is a great way of predicting where you will need to finance shortfalls in cashflow.
Understanding the Cash Cycle
There are various things we can do to reduce the ‘cash cycle’. The cash cycle is a great way of measuring the way relationship between incoming and outgoing payments.
Cash cycle is:
Time that elapses between the delivery of inventory and its conversion into sales (1 week)
PLUS time that elapses between the sale of goods and services to customers and receipt of monies due from these accounts receivable (nil – payment terms are cash on delivery)
LESS time that elapses between the receipt of goods and services from suppliers and subsequent payment to these accounts payable (4 weeks)
= 1 week + 0 weeks – 4 weeks = -3 weeks
The -3 weeks above refers to the fact that in this example you would have delivered your goods or services to your customer and received payment for them 3 weeks before you would actually have had to pay your suppliers for them. This is good cash flow. It effectively means your customers are financing your business. They are paying you to pay your suppliers.
To improve the cash cycle look to get better terms from your suppliers (increase creditor days). There are a number of payment terms such as pre-paying for supplies, or paying cash on delivery, beyond that you may have 30/60/90 day terms. Try to get the best possible deal for you business. The rule of thumb is try to arrange to pay you bills as late as you possibly can. Don’t do this in a unethical way. Such as telling a supplier the cheque is in the post, but negotiate with them a deal that satisfies you both. If you mislead supplies they may refuse to deal with you again, which can cause you damage to your business and reputation.
On the other side of the equation are “customer payment terms”, it is good practice to look at reducing debtor days wherever possible. Getting money up-front, or cash on delivery is the best you can aim for. Try to avoid giving your customers credit for 30/60/90 days unless you know you can deal with the lack of cash coming in. Generally it is difficult to dictate terms outside your industries norms, unless you are particularly valuable to your supplier or customers, but try to get the best deal for your business that you can.
There are other things you can do within your business to help improve your cash flow position. I have myself used interest free credit periods on credit cards to get me over difficult periods. If your business holds stock you can look to reduce stock levels by improving inventory control and using warehousing to store inventory from suppliers to improve bulk buying margins
Increase stockturn (less stock levels moved quicker) on the basis of forward cover (reduced volume of stock order, order more frequently), or Improve IT ordering system to help control stock levels and avoid holding too much stock and running out of inventory.
Rationalize outlets by scaling down outlets by closing not profit making outlets or by move away from cyclical sectors into more non-cyclical sectors.
Cash flow isn’t an easy subject to master, mainly because when you start to talk about the subject most peoples eyes start to glaze over. But lets be clear, it is one of the most important aspect of running a business you should understand, other wise your business life could be short lived.
Fear results from a perceived devaluation of self, which also includes anything we’re attached to, such as ideas, beliefs, people, memories, our body’s, even our favourite football team etc. Fear is an evolutionary emotion that triggers our fight or flight response to keep our “self” alive (preserve life).
Although we can still face life threatening situations, they are less common than they were when we fighting sabre tooth tigers.
Because we absorb things we value into our “sense of self”, we can feel the same fear that we experience when our life may actually be threatened, in none life threatening situations, such as talking in public, and watching our favourite team participating in a penalty shoot out.
In life, fear can hold us back from pursuing our Goals by fooling us into thinking, we won’t be good enough, or we’ll be happier staying where we are.
In business, fear of taking action can be a result of a perceived devaluation of our sense of self:
• Failing, and not being as capable as we would like to believe we are (feel bad due devalued “sense of self”)
• Not being able to cope with the demands of our success (devaluation of “control” due to loss of control, “harmony” and devaluation to “family life”)
• Having to spend all our time working (devaluation of “family” and “leisure time”)
• Fear of the unknown (possible devaluation of “harmony” or “comfort zone”)
Manage FEAR and conflicts by identifying them, acknowledging and working through them to resolution. If your goal doesn’t accommodate what you fear you will lose in achieving it, you will remain torn.
There is always a way to achieving a goal and resolving any fears you may have in the acquisition of that goal, which are, after all, only real in your mind.
Jim Carey said it best
“There is a huge difference between a dog that is going to eat you in your mind and an actual dog that is GOING TO EAT YOU”.
Check out iamspirituality.com for more information about how your emotions work, and listen to Jim Carey’s speech below for some inspiration in following your goals. Choose Love over Fear.
If you would like to read more articles focused on FEAR, click here.
However good your product or service is, the simple truth is that no-one will buy it if they don’t want it or believe they don’t need it. And you won’t persuade anyone that they want or need to buy what you’re offering unless you clearly understand what it is your customers really want.
Knowing and understanding customer needs is at the centre of every successful business, whether it sells directly to individuals or other businesses. Once you have this knowledge, you can use it to persuade potential and existing customers that buying from you is in their best interests.
This guide tells you what you need to know about your customers, how to use this information to sell to them more effectively, and how to win business from your competitors.
Why do your customers need you?
Every business needs a reason for their customers to buy from them and not their competitors. This is called a Unique Sales Proposition (USP). Your USP can be identified by completing the phrase “Customers will buy from me because my business is the only…”
Your USP can change as your business or your market changes, and you can have different USPs for different types of customer.
A stationery shop could offer a free same-day delivery service for its business customers within a local area – an effective USP for businesses that need fast delivery
The same stationery shop could offer a 5 per cent discount to businesses that spend more than £500 a month – this would be a USP for cost-conscious customers
The stationery shop could also make sure it offers the most comprehensive stock of artists’ materials in the area – a USP for local professional or amateur artists
All of these USPs can be effective because they are driven by what the customer looks for when making a buying decision.
It’s a good idea to review your USPs regularly. Can you tailor your products or services to better match your customers’ needs? Consider asking your customers why they buy from you. This will tell you what they think your USP is – this may differ from what you think your USP is.
It’s also useful to check constantly what your competition is doing. Remember – if your competitors are doing the same, your USP isn’t unique any more.
What do you know about your customers?
The more you know about your customers, the more effective your sales and marketing efforts will be. It’s well worth making the effort to find out:
who they are
what they buy
why they buy it
If you’re selling to other businesses, you’ll need to know which individuals are responsible for the decision to buy your product or service. For information on targeting decision-makers, see our guide on how to target the right people in an organisation.
You can learn a great deal about your customers by talking to them. Asking them why they’re buying or not buying, what they may want to buy in the future and asking what other needs they have can give a valuable picture of what’s important to them.
Strong sales are driven by emphasising the benefits that your product or service brings to your customers. If you know the challenges that face them, it’s much easier to offer them solutions. See our guide on how to sell the benefits, not the features.
It’s also well worth keeping an eye on future developments in your customers’ markets and lives. Knowing the trends that are going to influence your customers helps you to anticipate what they are going to need – and offer it to them as soon as they need it.
You can conduct your own market research and there are many existing reports that can help you build a picture of where your customers’ markets – and your business – may be going.
The customer’s current supplier
Chances are your potential customer is already buying something similar to your product or service from someone else. Before you can sell to a potential customer, you need to know:
Who the customer’s current supplier is
If the customer is happy with their current supplier
If buying from you would offer the customer any benefits – and, if so, what those benefits would be
The easiest way to identify a potential customer’s current supplier is often simply to ask them. Generally people are very happy to offer this information, as well as an indication of whether they’re happy with their present arrangements.
If you can find out what benefits they’re looking for, you stand a better chance of being able to sell to them. The benefits may be related to price or levels of service, for example. Are there any benefits your business can offer that are better than those the potential customer already receives? If there are, these should form the basis of any sales approach you make.
Who they are – If you sell directly to individuals, find out your customers’ gender, age, marital status and occupation. If you sell to other businesses, find out what size and kind of business they are. For example, small private company or big multinational.
What they do – If you sell directly to individuals, it’s worth knowing their occupations and interests. If you sell to other businesses, it helps to have an understanding of what their business is trying to achieve.
Why they buy – If you know why customers buy a product or service, it’s easier to match their needs to the benefits your business can offer.
When they buy – If you approach a customer just at the time they want to buy, you will massively increase your chances of success.
How they buy – For example, some people prefer to buy from a website, while others prefer a face-to-face meeting.
How much money they have – You’ll be more successful if you can match what you’re offering to what you know your customer can afford.
What makes them feel good about buying – If you know what makes them tick, you can serve them in the way they prefer.
What they expect of you – For example, if your customers expect reliable delivery and you don’t disappoint them, you stand to gain repeat business.
What they think about you – If your customers enjoy dealing with you, they’re likely to buy more. And you can only tackle problems that customers have if you know what they are.
What they think about your competitors – If you know how your customers view your competition, you stand a much better chance of staying ahead of your rivals.
Segment your customers
Only a percentage of the general population will buy your products or use your services, so the more accurately you focus your marketing on them, the less your efforts will be wasted. It is a good idea not to aim too widely with your marketing, to avoid spreading your resources too thinly.
This guide aims to explain the basics of how to sort your customers into groups and helps you understand:
what your customers want
what you can offer them
the benefits of putting your customers into market segments
Understanding the basic segments of your customer base is a good foundation for winning and keeping profitable customers.
Benefits of segmentation
Segmenting your customers into groups according to their needs has a number of advantages. It can help you to:
identify your most and least profitable customers
focus your marketing on the customers who will be most likely to buy your products or services
avoid the markets which will not be profitable for you
build loyal relationships with customers by developing and offering them the products and services they want
improve customer service
get ahead of the competition in specific parts of the market
use your resources wisely
identify new products
improve products to meet customer needs
increase profit potential by keeping costs down, and in some areas enabling you to charge a higher price for your products and services
group your customers by factors such as geographical location, size and type of organization, type and lifestyle of consumers, attitudes and behaviour
See our guides on how to target the right people in an organisation and how to know your customers’ needs.
Because your individual customers have differing needs, it will be easier to give them what they want if you divide them into groups sharing similar needs, and treat each group differently.
You can then:
customise your products and services according to the needs of each segment
aim your marketing at each particular group, saving you time and money
focus on your most profitable customers
Many businesses aim at the greatest possible number of segments, with the smallest number in each, but also try to keep the number of segments at a level that is easy to manage.
How you segment your customers will depend on whether you are marketing your products and services to:
businesses or organisations – business-to-business or B2B
individual consumers or households – business-to-consumer or B2C
If you are segmenting business markets, you could use the following groups to describe your customers’ organisations:
What they do – industry sector, public or private, turnover, number of employees, location
How they operate – technology, use of your products
Their buying behaviour
How they place orders, their size and frequency
How they behave – loyalty and attitude to risk
If you are segmenting consumer markets, you could use the following groups of ways to describe your customers:
Location – by towns, regions and countries
Profiles – such as age, gender, income, occupation, education, social class
Attitudes and lifestyles
Buying behaviour – including product usage, brand loyalty and the benefits they seek from the product or service
Below is an example of segmentation for home computers that a computer manufacturer might use to optimise its products and marketing mix, and so command a higher price.
Users/segment Features provided to address needs
Family General and educational software, basic games, DVD player, “safe” access to the Internet, email accounts for each member of the family
Small or home office (SOHO) Business software, fax, broadband access to the Internet, high quality printing, document scanning and reproduction
Specialist use Specialist software and hardware configurations for applications such as design or digital image processing, printing and storage
Gaming Multimedia games, broadband Internet access, high quality display, sound, special peripherals like joystick, powerful processor
For more advice, see our guides on how to manage your customer database, know your customers’ needs and identify your most valuable customers.
Approaches to segmentation
To segment your customers, you will need to use variables, such as:
An organisation’s sector, size, location and buying patterns
An individual’s age, gender, lifestyle, region, buying behaviour and attitudes
Some businesses use vertical segmentation – selecting particular industries or professions to whom their product or service is likely to appeal. You can also use horizontal segmentation, such as selecting only one job title across a range of organisations.
To find out about your customers, many businesses conduct market research. There are two main types:
Original research – which involves contacting your customers, and which will give you detailed information about them
Desk research – using published market reports and statistics covering general markets
The main ways of carrying out original research are by:
Email or web surveys
Once you have carried out your research, you can then adapt your marketing to reach customers and deliver the products and services they want.
Once you have identified the segments, you can profile customers within them. For example:
Profile Example from market Variable used
Engineering managers and project engineers in process plants Engineering services or products Behavioural
Female drivers aged between 35 and 50 Motor insurance Demographic
“Dinks” – dual income, no kids Travel/holidays Socio-economic
Skilled workers in home-owning areas (ACORN) DIY products Geographic
Segmenting your customers can help you to identify a niche market – a specific, well-defined area of your market that may be overlooked by competitors.
How to find a niche market
It is a good idea to look more closely at your markets, in order to:
Identify whether there are any market segments that are not well covered at the moment
Think of ways in which you can offer products or services to fit the individual needs of these segments
How to exploit a niche market
To maximise sales to any niche markets you might have identified you should:
Do your research to find out if such a niche exists and how it could best be served
Try to find out as much as you can and develop expertise in the niche market
Remember that going into niche markets can be a risky business:
Make a business case before you try to enter a niche market
Be on your guard for reaction from competitors already operating in the niche
Monitor the market and be prepared to move to another niche
Don’t put all your eggs in one basket
For more advice, see our guides on how to create your marketing strategy and know your customers’ needs. You can also find services for the marketing profession on the Chartered Institute of Marketing website.
Identify and sell more to your most valuable customers
Being in a position to focus on your most valuable customers might sound like a luxury. After all, many small businesses are grateful for customers of any kind.
But every business finds that some customers are more valuable than others. This can be for a range of reasons, from the size of their purchases to the relative ease of managing their account. Successful businesses are generally those that identify these customers, focus their sales efforts towards them and work to bring in new customers with a similar profile.
This guide outlines how to identify which of your customers are the most valuable to you. It also provides tips on selling more to these customers and attracting new high-value customers.
The benefits of understanding your customers
Understanding your customers helps you sell more – you can target them with appropriate offers. The more you know about them, the easier it is to spot opportunities to sell them new products.
Profiling existing customers also makes it easier to find new ones. You can look for similar prospects, and sell to them in a similar way.
You can use the information you have on customers to improve efficiency. Keeping a central record of customer details and sales reduces errors and speeds up transactions. For more information on using IT to improve efficiency, see our guide on how to create the infrastructure for growth.
You can also improve customer service. Better access to information helps you deal with customers more quickly. You can tailor product offerings and provide personalised treatment. The right information makes it easier to track down and resolve any problems.
Finally, understanding your customers helps your planning. You can predict what they will buy, and estimate how much stock you need. Linking customer management to purchasing can dramatically improve profitability. See our guide on how to manage your customer database.
Learn about your customers
Your customers are a hugely valuable source of information, so you should aim to collect data that lets you identify your customers and how they behave. This will vary depending on your customer profile. If you sell to individual consumers, you might want to know about their age, gender, income and so on. For businesses, you might want to know what industry they are in and how large they are.
You should also try to find out what they think about you and your products and services. For example, learn what they like and dislike and why they choose to buy from you.
If you have just a few important customers, it’s worth getting detailed feedback from them. Companies that sell to individual consumers sometimes use customer surveys. If you sell on-line, you can use your website to capture some information automatically.
Of course, as well as collecting the information, you need to store it. The most effective way is to use a central database. See our guide on how to manage your customer database.
You must ensure that you comply with regulations covering personal information. For example, you must ensure that personal information is stored securely. You may also be legally required to notify the Information Commissioner before you start collecting and using customer data. See our guide on how to comply with data protection legislation.
Make customer information available
Making customer information available to employees can make them more productive. For example, you could give sales staff access to financial systems so that they can check orders and payments. You need to decide what information different employees might need, and how to make it available to them.
Technology can help. For example, you can share correspondence and other information on your computer network. Using caller recognition, staff can view an incoming caller’s details and purchasing history before even answering the phone. Integrated IT systems help different parts of your business to share what they know – see our guide on how to create the infrastructure for growth.
It’s important for information to be accurate. You may want to update records regularly, taking care to delete duplicate entries. You could also give customers online access, so that they can update their own details themselves.
At the same time, you need to ensure that information is kept secure. As a minimum, you are legally required to protect personal information. See our guide on how to comply with data protection legislation.
You will also want to ensure that any confidential or important information is protected against misuse or accidental deletion. See our guide on how to keep your data secure.
Analyse your customers
The right information will let you build up a useful profile of your customers. This typically includes the following:
Who they are – the age and gender of individual consumers, or industry and business size for corporate customers.
What they think and believe, what interests them and what they think of you and your product.
Their purchasing behaviour – which products they buy, where they buy them, when, and how they pay.
Profiling your customers in this way helps you group them into different segments, each of which can be approached separately. For example, you might produce customised products or services for different segments. You can also focus the way you market to different groups of customers. See our guide on how to segment your customers.
The right IT can help you collect and analyse your data. For example, linking customer records to your accounting system makes it easier to see how profitable different customers are. See our guide on how to manage your customer database.
What makes your customers valuable?
Analysing your customers allows you to identify those who best fit with your business priorities. These will depend on your strategy – for example, if you are launching a new product your aim might be to build sales as quickly as possible, whereas if you have cashflow problems you might value customers who pay quickly.
However, most businesses want customers who are as profitable as possible. Customers tend to be more profitable if they:
Buy high-margin products
Pay full price without negotiating discounts
Place a small number of large orders rather than many small orders
Do not cancel or amend orders
Pay on time, without being chased for payment
Do not require extensive after-sales service
Analysing your records lets you assess how profitable each customer is. If you haven’t looked at this before, the results can be surprising. In some businesses, just a few customers are responsible for almost all the profits. Some of your largest customers might be among your least profitable. You may even find that there are some customers you would be better off without.
You should also try to look ahead. For example, a business customer that is expanding might become more profitable for you in the future. It’s important to anticipate changes and how they might affect different customers. You can use our interactive tool to discover who your most valuable customers are.
Enhance the customer experience
Looking after your customers helps build customer loyalty. Selling more to existing customers is far more cost-effective and profitable than finding new ones.
Focus on your most valuable customers
Tailor your products and service to meet their specific requirements. If a customer prefers delivery before noon, organise your delivery schedule to make sure that’s what happens.
Don’t stretch yourself too thin. Make sure enough time is given to managing each of your key accounts.
Offer gold standard customer care. Identify and resolve problems quickly. Always live up to your promises.
Keep in touch. Let them know when service contracts need to be renewed or better deals become available.
Build personal relationships with key decision-makers.
Consider offering preferential terms – eg a bulk discount.
Technology can help you improve the service you offer. For example, you might be able to let customers track deliveries through your delivery company’s website. You can use your website to provide useful information, such as product details or instruction manuals.
For more information, see our guide on how to manage your customer care.
Market more effectively
The more you know about your customers, the more effectively you can market to them.
Advertising and other promotions can be more effective if they are targeted. Understanding your customers lets you tailor your marketing to different segments. You can ensure that each customer gets the right marketing messages, at the right time.
This also affects the type of media you use. For example, if you have a market amongst 15-24 year olds, you might consider marketing via text messaging, using “viral” emails or by sponsoring music events.
You can also sell more effectively. Understanding your customers helps you see what needs your product can satisfy. You may, for example, be able to up-sell, explaining why a higher priced product would suit them better. You may also find opportunities to cross-sell other products that fit their profile. For example, if you know why they are buying a particular product, you can tell which other products they may also need.
Technology can help automate some of these processes. For example, you can set up different mail shots or emails to go to different customer segments. E-commerce software can allow you to offer discounts to particular customer groups, or send selected customers “e-coupons” to use in your online store.
An important part of effective marketing is customer service. See “How to enhance the customer experience”.
Find new customers
Understanding who your most valuable customers are helps you focus your efforts to find new customers. Often, the most effective approach is to look for similar prospects.
At the same time, diversification is important.
It’s risky relying too heavily on just a few key customers. Even if you have many customers, you are at risk if they are too similar. A change in circumstances could mean that all of them reduce their purchases at the same time – if your three largest suppliers are based in the US, a change in the exchange rate could see them drastically reduce their orders.
As markets change, you should review your marketing strategy. Particular market segments may become less profitable as competition increases. Customers’ requirements may change, for example, as individual consumers become older.
Continually review how valuable your existing customers are. Over time, customers who used to be highly profitable might demand lower prices. Other customers may increase their turnover with you as they grow. See the page in this guide on what makes your customers valuable.
Keep an eye on customers’ future potential as well. It may be worth nurturing a relationship with a small customer with high growth potential. Working with your customers can also help you identify ways to develop new and improved products.
Manage your customer database
Organisations are increasingly using databases to manage customer relationships to increase both sales and customer satisfaction. A database can help you identify key trends and important information such as your most and least profitable customers. The coherent management of relationships with customers is called Customer Relationship Management (CRM), and it plays an important role in many small business’ sales and marketing strategies.
This guide will help you to understand both how to use a database for marketing and the concept of CRM. In particular, you will learn what kind of information your business should collect in a CRM database and how to integrate it with other systems in your business.
The guide also outlines the practical steps in getting a database started, such as what sort of system to acquire, how to find the right supplier or solutions provider and how to develop your customer database.
Database marketing and CRM – the benefits
Understanding what and how your customers buy from you is essential to the success of your business.
The benefits of this are:
increased sales to new and existing customers through better timing, identifying needs more effectively and cross-selling of other products
effective marketing communications, through a more personal approach and the development of new/improved products/services
enhanced customer satisfaction and retention
increased value from your existing customers – and reduced cost-to-serve
An effective marketing database and Customer Relationship Management (CRM) system will enable you to analyse the data, to find out who your most profitable customers are and what characteristics they share. This will help give you a clear idea of what sort of person or organisation to focus your marketing on. It may, for example, be possible to group customers according to geographic area or your own promotional and sales efforts.
You will also be able to communicate successfully with your customers by identifying similar groups of customers to target by a particular method, such as telephone, direct mail, email or face-to-face. You might, for example, want to reward regular, profitable customers with targeted special offers, or you might want to target customers from whom you haven’t had business in the past year. It can also help you measure the effectiveness of your marketing so that you don’t waste time and money on customers who aren’t responding to your promotional campaigns.
CRM is a sales and marketing issue, not a matter of IT. It is about developing a strategy and a set of tools for improving your customer knowledge, which is supported – not led – by the technology.
Set up a CRM system
There are a number of practical issues to consider in terms of introducing a marketing database or Customer Relationship Management (CRM) system:
You will need to estimate the likely scale of the system
You will have to strike a balance between your requirements and your available budget
You should consider the need or the benefit of integration with other business systems
There are a number of choices when setting up a computer-based database. You could create a simple system yourself, perhaps by using a software package such as Microsoft Access, which could fit in with your current computer systems. This is the least expensive option.
Buying off-the-shelf software, perhaps one of the leading CRM packages specifically designed for smaller businesses, is another option. Software companies like Oracle, Navison, SAP, Peoplesoft, Microsoft, Onyx and Pivotal offer applications that integrate with existing accounts and transaction processing packages.
Scaled-down versions of off-the-shelf software, offered by most of the major application providers, may be suitable for smaller businesses. See the page in this guide on how to choose a supplier.
You could commission bespoke software. Consultants and software specialists can customise or design a software solution and integrate it with your existing software and/or your website. This is more appropriate for larger and more complex businesses.
Or you could opt for a managed CRM solution. Rather than buy a software package, many companies offer a service where they own the software and you buy the use of it, normally for a period of time. The supplier, often called an Application Service Provider (ASP), would normally provide expertise to develop and maintain the database.
Some suppliers also provide specific CRM services such as data mining – the analysis of patterns and relationships of data within a database. See our guide on customer relationship management.
Compiling your data
You can use information already held about your customers – whether on manual or computerised systems – to build a database.
Your accounts system may contain information such as:
Existing customer lists
Consider what kind of information would be useful. This might be:
Contact information, eg company name, address, telephone and fax numbers, and names and job titles of relevant contacts
What they have bought from you, when, and from which salesperson – so you can identify what they seem most likely to buy and then plan your sales and marketing efforts
Their service history and any complaints
Their account history, to assess whether they pay on time, and how profitable they have been – some customers may not actually be very profitable
Together, this information should give you an idea of who are your best and worst customers, and what they buy from you.
You might include areas such as the response to previous promotions. Your purpose is to establish the “how” and “why” of responses or sales.
The next stage is to decide an appropriate structure for your data.
If you are selling to business markets, you could compile information about:
What they do – industry sector, public or private sector, turnover, number of employees and location
Their buying behaviour – how they place orders, their size and frequency
Names of contacts within a company
If you are selling to consumers, you could compile information about:
Your customers’ buying behaviour, including product usage and brand loyalty
Their age, gender, occupation and approximate income
When compiling information, check that you have complied fully with legal requirements, particularly those of the Data Protection Act 1998. You can learn about the Data Protection Act 1998 at the Information Commissioner website.
Developing the database
A good marketing database will include details of prospective as well as existing customers. People who enquire about your company should be included and “flagged” for approach in the future.
Only a percentage of the general population will buy your products or use your services. If you focus your marketing on them, your efforts will be more successful. Aim too widely with your marketing and you risk spreading your resources too thinly.
Not all customers have the same needs. It makes sense to build up a profile of your customers and group them according to their different requirements. This will give you a good idea of how likely they are to purchase what you are offering.
Having established this customer profile you should consider looking for additional prospects from outside “lists”. Lists of potential customers are held by brokers whose names you can find in local or marketing directories. Or you could become a member (for a fee) of the Direct Marketing Association at the Direct Marketing Association website.
You can specify exactly what type of person or organisation you want on your list, in terms of the:
Size and type of the organisation – if you are selling to businesses
Age, sex, income or lifestyle – if you are selling to individual customers
Lists are usually offered for:
Rent – one-off use only
Sale – providing unlimited usage
If the list is rented, most organisations forbid you from adding the names on the list to your database, except when you have received a response to your approach.
You should therefore consider making a generous offer to your prospective customer to encourage them to respond.
Keeping the database accurate
Data hygiene – the principles and practices that serve to maintain accuracy in computer data – is crucial for an effective Customer Relationship Management system. It is a good idea to “clean” your database regularly.
Wrong data is not only wasteful of your budget, but can adversely affect your business’ image through:
Inadequate data organisation reduces the ability to communicate to the right customer.
Advanced data tagging and enhancement technology and services can provide the highest possible standards of data accuracy and consistency.
By adopting such methods, you can:
Improve efficiency – businesses that do not employ data capture tools at the point of customer contact often suffer from capturing records that are misspelled, incorrect or are missing important details.
Ensure compliance with your legal obligations, particularly those relating to the Data Protection Act 1998 and electronic marketing. Consumers can opt out of receiving marketing by telephone, fax, post or email, and it is important that people who have opted out are removed from your database.
Improve campaign effectiveness – inaccurate data can result in the proposed message not reaching the targeted recipient, although you will still incur the cost of delivery.
If the information you have on record changes frequently, you might consider automating your update procedures, perhaps by means of integration with other systems.
Keeping a customer or prospective customer file up to date will invariably help with marketing costs, improved response rates, better targeting and more accurate communications by telephone, fax, post or email.
Learn about the Data Protection Act 1998 at the Information Commissioner website.
How to choose a supplier
The main decision when choosing a supplier depends on the type of solution required. You have a number of choices:
General database software
Off-the-shelf customer databases
Application Service Providers
It’s a good idea to try to quantify the anticipated benefits of improving Customer Relationship Management for your business. It may help to calculate how it will affect revenues, profitability and the cost of servicing customers.
Fundamentally, this is an investment in your business rather than a cost. The return on that investment is not just increased sales, but satisfied customers who feel that they are being treated as individuals.
You may want to set a budget and research appropriate solution providers. This might be done by carrying out a cost-benefit analysis.
You might wish to bear the following points in mind:
What the cost is per user or per licence
How many software licences you need
If buying a product, what the cost is of updates and in-house support costs
If renting a service from a supplier, the set-up and subscription fees
You could also find out about the most commonly employed solutions:
Within your industry
Adopted by similar sized businesses in other sectors
You might find it helpful to prepare a brief. This could simply be a statement of your aims and objectives, rather than an attempt to solve detailed problems. Take into account the data you already have and the format it is in.
You might decide to target two to four potential suppliers, and request proposals from each.
Be prepared to invest time and money in the process.
Manage your customer care
Customer care is a crucial element of business success. Every contact your customers have with your business is an opportunity for you to improve your reputation with them and increase the likelihood of further sales.
From your telephone manner to the efficiency of your order-fulfilment systems, almost every aspect of your business affects the way your customers view your business. But there are also specific programmes you can put in place to increase your levels of customer care.
This guide outlines what customer care involves. It explains how you can use customer contact, feedback and loyalty schemes to retain existing customers, increase your sales to them and even win new customers. It also covers how to prepare for receiving a customer complaint.
What is customer care?
Customer care involves putting systems in place to maximise your customers’ satisfaction with your business. It should be a prime consideration for every business – your sales and profitability depends on keeping your customers happy.
Customer care is more directly important in some roles than others. For receptionists, sales staff and other employees in customer-facing roles, customer care should be a core element of their job description and a core criterion when you’re recruiting.
But don’t neglect the importance of customer care in other areas of your business. For instance, your warehousing and dispatch departments may have minimal contact with your customers – but their performance when fulfilling orders has a major impact on customers’ satisfaction with your business.
A huge range of factors can contribute to customer satisfaction, but your customers – both consumers and other businesses – are likely to take into account:
How well your product or service matches customer needs
The value for money you offer
Your efficiency and reliability in fulfilling orders
The professionalism, friendliness and expertise of your employees
How well you keep your customers informed
The after-sales service you provide
For customer-facing employees such as receptionists and salespeople, customer care is a core part of the job. Customer service levels should be a key criterion when recruiting for these roles.
Training courses may be useful for ensuring the highest possible levels of customer care. For further information about where to find training, see our guide on how to find a training provider/course.
The Office of Fair Trading (OFT) has launched the Consumer Codes Approval Scheme logo. The logo is awarded to trade associations that can demonstrate that their code of practice meets high standards of customer service. Find out if your trade association has an approved code of practice on the OFT website. Find your trade association on the Trade Association Forum website.
Understand your customers
In business-to-business trading, providing a high level of customer care often requires you to find out what your customers want. Once you have identified your most valuable customers or best potential customers, you can target your highest levels of customer care towards them. Another approach, particularly in the consumer market, is the obligation to treat all consumers to the highest standard.
Collect information about your customers
Information about your customers and what they want is available from many sources, including:
Their order history
Records of their contacts with your business – phone calls, meetings and so on
Direct feedback – if you ask them, customers will usually tell you what they want
Changes in individual customers’ order patterns
Changes in the overall success of specific products or services
Feedback about your existing range – what it does and doesn’t do
Enquiries about possible new products or services
Feedback from your customers about things they buy from other businesses
Changes in the goods and services your competitors are selling
Feedback and referrals from other, non-competitive suppliers
Manage your customer information
It’s important that you draw up a plan about how customer information is to be gathered and used in your business. Establish a customer-care policy. Assign a senior manager as the policy’s champion but make sure that all your staff are involved – often the lower down the scale you go, the more contact with customers there is.
You can manage your customer records using a database system or with customer relationship management software.
You should be aware that collecting and using customer information may require you to register with the Information Commissioner and comply with data protection regulations. For more information on data protection, see our guide on how to comply with data protection legislation.
Measure your customer service levels
Where possible, put systems in place to assess your performance in business areas which significantly affect your customers’ satisfaction levels. Identify Key Performance Indicators (KPIs) which reflect how well you’re responding to your customers’ expectations.
For instance, you might track:
Sales renewal rates
The number of queries or complaints about your products or services
The number of complaints about your employees
The number of damaged or faulty goods returned
Average order-fulfilment times
The number of contacts with a customer each month
The volume of marketing material sent out and responses generated
Time taken from order to delivery
Your customers and employees will be useful sources of information about the KPIs which best reflect key customer service areas in your business. Make sure the things you measure are driven not by how your business currently runs, but by how your customers would like to see it run.
There are important areas of customer service which are more difficult to measure. Many of these are human factors such as a receptionist’s telephone manner or a salesperson’s conduct while visiting clients. In these areas it’s crucial that you get feedback from your customers about their perceptions of your customer service.
Customer surveys, feedback programmes and occasional phone calls to key customers can be useful ways of gauging how customer service levels in your business are perceived.
Customer feedback and contact programmes
Customer feedback and contact programmes are two ways of increasing communication with your customers. They can represent great opportunities to listen to your customers and to let them know more about what you can offer.
Customer feedback can provide you with detailed information about how your business is perceived. It’s a chance for customers to voice objections, suggest changes or endorse your existing processes, and for you to listen to what they say and act upon it. Feedback is most often gathered using questionnaires, in person, over the telephone or by post.
The purpose of customer contact programmes is to help you deliver tailored information to your customers. One example is news of a special offer that is relevant to a past purchase – another is a reminder sent at the time of year when a customer traditionally places an order. Contact programmes are particularly useful for reactivating relationships with lapsed customers.
Do your best to make sure that your customers feel the extra contact is relevant and beneficial to them – bombarding customers with unwanted calls or marketing material can be counter-productive. Newsletters and email bulletins allow you to keep in touch with useful information.
Customer loyalty schemes
While good overall service is the best way of generating customer loyalty, sometimes new relationships can be strengthened, or old ones refreshed, using customer loyalty schemes.
These are programmes that use fixed or percentage discounts, extra goods or prizes to reward customers for behaviour that benefits your business. They can also be used to persuade customers to give you another try if you feel you have successfully tackled past problems with your customer service.
You can decide to offer rewards on the basis of:
Orders for large quantities or with a high value
Length of relationship
For example, a car wash might offer free cleaning every tenth visit or a free product if a customer opts for the deluxe service. A mail-order company might seek to revive the interest of lapsed customers by offering a voucher redeemable against purchases – response rates with such vouchers can be improved by setting an expiry date.
You can also provide key customers with loyalty cards that entitle them to a discount on all their purchases.
Employees who deal with customers’ orders should be fully aware of current offers and keep customers informed. Sometimes brochures and other marketing materials are the best way of getting word out about a new customer incentive.
Don’t forget though that your customers’ view of the overall service you provide will influence their loyalty much more than short-term rewards will.
Use customer care to increase sales
Your existing customers are among the most important assets of your business – they have already chosen you instead of your competitors. Keeping their custom costs far less than attracting new business, so it’s worth taking steps to make sure that they’re satisfied with the service they receive.
There are a number of techniques you can employ, including:
Providing a free customer helpline
Answering frequently asked questions on your website
Following up sales with a courtesy call
Providing free products that will help customers look after or make the most of their purchases
Sending reminders when services or check-ups are due
Offering preferential discounts to existing customers on further purchases
Existing customer relationships are opportunities to increase sales because your customers will already have a degree of trust in your recommendations.
Cross-selling and up-selling are ways of increasing either the range or the value of what you sell by pointing out new purchase possibilities to these customers. Alerting customers when new, upgraded or complimentary products become available – perhaps through regular emails or newsletters – is one way of increasing sales.
To retain your customers’ trust, however, never try to sell them something that clearly doesn’t meet their needs. Remember, your aim is to build a solid long-term relationship with your customers rather than to make quick one-off profits.
Satisfied customers will contribute to your business for years, through their purchases and through recommendations and referrals of your business.
How to deal with customer complaints
Every business has to deal with situations in which things go wrong from a customer’s point of view.
However you respond if this happens, don’t be dismissive of your customer’s problem – even if you’re convinced you’re not at fault. Although it might seem contradictory, a customer with a complaint represents a genuine opportunity for your business:
If you handle the complaint successfully, your customer is likely to prove more loyal than if nothing had gone wrong.
People willing to complain are rare – your complaining customer may be alerting you to a problem experienced by many others who silently took their custom elsewhere.
Complaints should be handled courteously, sympathetically and – above all – swiftly.
Make sure that your business has an established procedure for dealing with customer complaints and that it is known to all your employees. At the very least it should involve:
Listening sympathetically to establish the details of the complaint
Recording the details together with relevant material, such as a sales receipt or damaged goods
Offering rectification – whether by repair, replacement or refund
Appropriate follow-up action, such as a letter of apology or a phone call to make sure that the problem has been made good
If you’re proud of the way you rectify problems – by offering no-questions refunds, for example – make sure your customers know about it. Your method of dealing with customer problems is one more way to stay ahead of your competitors.e long term.”
Hugh Rank described a simple model of persuasion where he describes how BENEFIT PROMISERS (otherwise known as advertisers/ marketers) intensify certain aspects of their offering and downplay other aspects in an attempt to persuade BENEFIT SEEKERS (prospective customers) to buy from them as apposed to their competitors. His model also addresses how BENEFIT SEEKERS play a role in this process by the mere act of seeking such benefits.
It is useful to know Hugh Rank’s model of persuasion so you are able to defend yourself from the trickery used by marketers in their efforts to part you with your money. On the flip side, it can be equally as useful when devising your own marketing material, in your attempts to transform prospects to customers.
Intensify Downplay Schema Explained
We are all benefit seekers at times in our daily lives, playing an active part in the persuasion process as seekers. Consider two factors relating to our roles as seekers:
#1 – Our perception of good and bad
#2 – If we have something in our possession or not
This allows us a deeper understanding of our own benefit-seeking behaviour related to the advertisements and marketing messages we are exposed to, allowing us to break it into four smaller parts:
Protection – keeping the good
Acquisition – getting the good
Relief – getting rid of the bad
Prevention – avoiding the bad
Benefit promisers (advertisers/ marketers) look to take advantage of our benefit seeking by intensifying their own “good” and downplaying their own “bad” and more aggressively intensifying others “bad” and downplaying others “good” to further enhance their marketing message.
When they Intensify their own “Good”
The promisers or would-be persuaders try to increase the significance of elements of their message so that the seeker will take their message on-board. They do this by use of repetition, association and composition.
Repeating a word or visual pattern so that it will be remembered and/ or accepted. This leads the seeker to believe that something is true or important.
Look for/ Listen for: Repeated words, sounds, visual elements, patterns (through either direct repetition or repetition of similar words, sounds, visual elements, patterns)
Linking or connecting information in a text to something or someone that is desirable or something that is feared. This can be done through words, visuals, or auditory details. The connection may be directly stated or implied.
Look for/ Listen for: Ideas, words, visuals, sounds that may be symbolic of abstract ideas e.g. a maple leaf to represent patriotism, ticking clock to represent passage of time or urgency, use of allusions/ references to people, events, media, pop culture, etc. with which the audience may be familiar, or appeals to emotions instead of logic
Organizing or constructing a message in order to have a specific impact. The message (what is desired) may be directly stated or implied or its opposite may be stated or implied.
Look for/ Listen for: Notice where words, visual elements, and ideas are placed in a message/ text. Things that are at the beginning of text or paragraphs and things that are at the end tend to be the ones that are emphasized for readers or viewers. Note how much space or text the words, visual elements, and ideas take up.
When they Downplay their own “Bad”
The persuader tries to decrease attention on details or ideas so that the seeker (who could be a reader/ viewer/ audience) see specific information as unimportant or not worth consideration. They do this using 3 tactics; diversion, omission and confusion.
Distracting the seeker (reader, viewer, listener) away from information which may be a required part of the message. This may be accomplished by reducing the audience’s attention to a part of the overall message. E.g. an expiry date on a carton of juice.
Look for/ Listen for: Small or hidden text or visual element or warnings at the end or embedded in a verbal message
Think about how the message would be different if elements were moved, reduced, or expanded.
Saying nothing about the things that go against a message or claim.
Look for/ Listen for: Consider what is missing from the text or message. Consider points of view or interests that are not considered or make up a small percentage of the overall message.
Creating uncertainty or misunderstanding around information seekers may already believe or know. The message (what is desired) may be directly stated or implied or its opposite may be stated or implied.
Look for/ Listen for: Use of complex or obscure data. Words or visuals which ask questions or create uncertainty in the seekers.
Furthermore Rank advocated the following sales structure, which went like this;
1. Hi – 2. Trust me – 3. You need – 4. Hurry – 5. Buy
Hi – which is made up of internal and external attention getting strategies, this is about getting the attention of the audience and keeping it long enough to hear the sales message, using physical, emotional and cognitive attention getting elements,
Trust me – is about building confidence through expertise, sincerity and benevolence,
You need – this is about stimulating desire via product centered or audience centered sales messages,
Hurry – urgency stressing is aimed at causing an emotional reaction in the audience so they feel compelled to take action without delay,
Buy – response seeking using a low friction call to action
This structure is similar to the well established Attention, Interest, Desire, Action (A.I.D.A) framework. You can find out more about it here.
Being aware of the underlying structure of persuasive marketing messages helps us appreciate how we may be hearing only the aspects someone else wants us to hear. We should listen with critical ears and be aware that the facts may be being manipulated in such a way as to get us to take a certain course of action.
Awareness is the best defence we have in such circumstances.
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The Goal setting strategy highlighted in this post is designed for businesses and individuals alike. Goal setting can be used for personal, business, health, and spiritual life, in fact whatever area of life you want to accomplish something.
You can have as many goals as you like in as many areas of your life as you like as long as you don’t overload yourself with an unrealistic amount of goals that are so plentiful you can’t keep track of them all.They can be changed at any time, altered, and redirected as you desire, but having goals, sets you off in a specific direction rather than just floating aimlessly. I advocate using one big “End Goal” which sets your life to a purpose, with all other goals supporting this “End Goal”.
Focus on one BIG Goal
Aim towards one big “End Goal”. A Goal will add purpose to your life. Check yourself before embarking on your journey. Check that your “End Goal” will give you the lifestyle you crave. Will you be doing what you want to do? Will it fit in with your family life? Will it give you the feeling you want it to? Will it allow you the right work/life balance you crave? Think about this carefully from the start. Don’t waste your life pursuing a goal you don’t really want.
Aim for one big “End Goal”
Check your “End Goal” will give you the life you crave
Break down into smaller mini Goals
Each action should be aimed at the attainment of your “End Goal”. Start from your “End Goal” and work backwards. Break your “End Goal” down into smaller mini goals whose purpose is the ultimate attainment of your “End goal”. Line up your daily, weekly, monthly, yearly mini goals like domino’s so that each one that is pushed over helps in knocking down the next. This will add momentum and make the next mini goal easier. It’s goal setting in the present, we can only shape the future with our actions in the present. Tomorrow never comes. “Doing it tomorrow” is simply procrastination and fear of failure, rejections or disappointment.
Break “End Goal” into smaller sequential “mini goals” line up like domino’s so that each mini goal helps in the attainment of the next
Mini goals should be daily, weekly, monthly, yearly all leading to the “End Goal”.
What’s the one thing I can do now to help in the attainment of the “End Goal”.
Start today. The present moment is the only moment we live in. So shape tomorrow with the actions of today.
The most important part is to take action. A sure way of not fulfilling your goals is failing to take action. Work out a sound plan of action and go for it. Don’t fear failure, because it is part of the learning process. Failure will help you test the soundness of your plan and help in your search for a better plan and for the attainment of your “End Goal”. Look for the best systems, models, habits and relationships that others have used to get the same “End Goal”. Who has achieved what you want to achieve and how did they do it?
The fear of failure, fear rejection, and fear of disappointment, will conspire to work against you and deter you from reaching your goals, they manifest themselves in the form of procrastination, indecision, overwhelm, anxiety and keeping yourself busy doing unnecessary things so that you feel busy. To test whether you are suffering from any of these, ask yourself “What would I be doing now if I knew I could not fail for the next 24/48/72 hours?”
Measurable – Put a deadline on it. If you treat it like a project with a deadline and work backwards. setting your mini goals as you go it will help you “think it through”. Moving it away from being just a hopeful dream into a doable project. It will help you see what needs to be done this week, this month, this year, in the next 3 years etc. Check your actual progress against your planned schedule to see if you are still on schedule.
Taking action is key, without action you will never reach any goal
Set deadlines for your mini goals and the “End Goal”, and check progress against the plan.
Don’t give up
You can only fail if you give up. Life has a habit of testing us as we move through it and this seems particularly true just before we make a major goal breakthrough. It seems to be testing to see if we are worthy of it. Make sure you don’t give up at the first signs of failure overtaking you. Remember to look at the systems, models, habits and relationships of others who have succeeded in achieving the goal your are aiming for and see what you can learn from them in the pursuit of yours. Check out my problem solving post about overcoming obstacles.
If you’re interested using the S.M.A.R.T. approach to goal setting it should be
Specific – Remember specific goals lead to specific actions
Measurable – If you can measure your goal you will know when you have achieved it. “If you can’t measure it you can’t control it” goes the management mantra
Attainable – don’t make goals easy to reach, In his book “The one thing”, Gary Keller advocates ignoring “doable” and “stretch” goals and going for “possible” goals, where you don’t currently have the skills to achieve it, this will allow you to grow into the goal in question.
Relative – Your goal should align with your morals and ethics and put you where you want to be in life. If it doesn’t align with your values and give you the life you want then it will not make you happy.
Timely – Set a timeline and aim for a deadline. Setting a deadline will help you focus on reaching your goal.
The most important part of any plan or goal is actually “taking action“. Without this crucial step nothing will come to fruition. A dream is but a dream unless you move to make it a reality. It’s not just about taking action, it’s taking action in the right way. Doing the important things that need to be done to carry out the plan and achieve your desired goal is what’s necessary. If you can act with purpose, make sure you are doing the important things in a productive manner you cannot fail to make progress. Throughout this post I am referring to “taking action” in a business sense, although many of the principles can be used for personal goals/plans with little adjustment.
Don’t let fear stop you
Sounds simple doesn’t it. Well it is as long as we don’t allow fear to overtake us and sabotage our actions. The fear of failing, the fear of rejection and the fear of disappointment are our enemies in such situations. They show themselves in the form of procrastination, indecision, overwhelm, insecurity and self doubt. To overcome these enemies we must re-frame them in our minds, believe we are good enough, not fear failure, but embrace it as a necessary component of making progress. If you have never failed at anything, you have never pushed yourself to your boundaries of your capability. Imagine your life inside a bubble: only by pushing past the boundary of that bubble can you make it bigger. A bigger bubble equals a bigger life. Quite often the fear of something is far worse than the actual experience of it, so get out of your head and get on with taking action.
We are sure to come across obstacles along the journey. Obstacles are part of the learning process, they test us and our plans. We should be refining and improving our plans as we move along our journey. If it were easy, everyone would be doing it, so difficulty is a barrier to entry for our competition also, and means that the weaker ones are weeded out along the way. You’re ahead of 90% of the population by even making a start, so take strength from that fact and push on. Use problem solving techniques to overcome difficult-to-solve obstacles, and look for “role models” to find better ways of doing things and overcome things that get in your way. Look at the systems, models, habits and relationships that successful people employ(ed) on their path to success. Research these and test them for yourself. Use the acronym M.A.R.S.H to remember these important areas of study.
Models – Business models are an area of study in themselves. It’s important to understand how businesses do what they do, the nine building blocks of business models include:
Core capabilities: The capabilities and competencies necessary to execute a company’s business model.
Partner network: The business alliances which complement other aspects of the business model.
Value configuration: The Value Configuration describes the arrangement of activities and resources that are necessary to create value for the customer.
Value proposition: The products and services a business offers. Quoting Osterwalder (2004), a value proposition “is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another.”
Target customer: The target audience for a business’ products and services.
Distribution channel: The means by which a company delivers products and services to customers. This includes the company’s marketing and distribution strategy.
Customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.
Cost structure: The monetary consequences of the means employed in the business model. A company’s DOC.
Revenue: The way a company makes money through a variety of revenue flows. A company’s income.
There are so many examples of business models
Auction business model
Bricks and clicks business model
Collective business models
Cutting out the middleman model
Direct sales model
Distribution business models, various
Freemium business model
Industrialization of services business model
Low-cost carrier business model
Loyalty business models
Monopolistic business model
Multi-level marketing business model
Network effects business model
Online auction business model
Online content business model
Premium business model
Professional open-source model
Pyramid scheme business model
Razor and blades business model (bait and hook)
Servitization of products business model
Subscription business model
Value Added Reseller model
Unbundling business model
The long tail business model
Multi sided platform model
Free as a business model
Open business model
Look for alternative ways of doing things and thinking “outside the box”. Look at other industries and see if it can be ripped and piveted for your purposes.
Relationships – Probably one of the best ways of getting what you want is by forming relationships with others. None of us are an island and we all need to develop good personal and working relationships. Form relationships with like minded people that can help you and you can help in return. There has to be some form of mutual exchange for any relationship to flourish. So don’t fall into the trap of forming relationships for pure selfish gain. Form them to improve the lives of all involved and nurture them with genuine concern and caring. Win win situations are the only sustainable option we have, otherwise eventually the one getting the raw end of the deal is going to feel used and unappreciated and move on, it’s just a matter of time. Think about how you can add value to other people’s lives in every aspect of yours. We all admire people that put others first. For example, I once had a guy, who I had never met, design me a website because he just “wanted to help me out”, he is now a good friend of mine and I still haven’t forgot that gesture. I have done similar myself since, and it feels great to do something special for another human being out of the blue.
Systems – Famous systems include franchises such as McDonald’s, where they can afford to employ lots of young adults with little or no work or life experience to work in a multi million pound fast food business and produce consistent food products time and time again. How do they do this? Well they have very efficient systems of food processing and product delivery that give consistent results. Systems include procedures, processes, courses of action or methods that achieve a specific result, consistently.
Habits – Habits are actions we do automatically, without thinking about them. We can form good or bad habits. Habits are formed with practice and doing and thinking things in a certain way over and over again.
Use goal setting to control the direction of actions. Taking action without goal setting is like driving around a town without having somewhere to go. So use goal setting to focus your actions like a compass, and move you in a direction that will lead to a better life.
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Hazel and I recently went for a lovely walk around Entwistle and Wayoh reservoirs which took us approx 100 mins to walk the 9 km distance, and I thought of how that walk was almost a metaphor for the road to business success.
When we first started it look such a long way, Hazel asked “Are we going to walk all the way around it?” but as I’m trying to lose weight at the moment, I thought it would do me good to do it. It reminded me of setting off with a business goal in mind that may cause us to question ourselves “Is this goal too big for me?” or “Can I do this?” Just making a start is half of the battle in these circumstances, make a start and see what happens.
As we walked around the reservoir we just took it one step at a time, not big steps but definite ones, one after the other. We were admiring the scenery as we went, it was such a lovely day. Before we knew it we had travel approx 4000 steps (according to our mobile phone app) when we turned back to see the distance we’d travelled we were surprised at our progress. It hardly seemed any time at all, yet those small steps had added up, partly because of our consistency of walking and partly because we were enjoying the walk so much. As in business if you take the important steps towards your goal, and try to get some enjoyment from the journey, you will be surprised how quickly you can make progress.
As we progressed along the pathway we found lots of alternative routes that went off into the surrounding woods, some of which looked rather interesting, but we stuck to our aim of going around the water’s edge. In business we face lots of distractions, that try to lure us from our main path. Beware of these time wasters. Stick to the quickest route to your destination otherwise you might find yourself lost and wasting time and effort, leaving you without the energy to get to your goal
Sometimes our path may be blocked and we are forced temporarily off route, and this is ok, we just have to take a diversion and get back on course as soon as we can.
As we passed the halfway stage of our walk we got a second wind of energy which seemed to add a spring into our step. There seemed to be a building momentum pushing us towards our destination. In business you find that the same thing seems to come to your aid after you’ve gone so far, pushing you forwards, or is it your goal pulling you to it?
When we finished after an hour and half or so, we had walked close to 9 km, not that far you may say, but for me, who has back trouble when walking, I thought it was a great achievement. I felt pleased that we had done it but was surprised how quickly we had done it and how easy it had seemed after all. Again in business you will find that sometimes goals, which seemed such long shots when you started out are indeed much easier to achieve that you worried they would be. But you’ll never know until you actually give it a go.
Set yourself a big goal
Formulate a plan of action – the best way to achieve your goal
Make a start towards your goal – just do it
If you hit any road blocks take enough of a diversion to get passed it and carry on
Let momentum push you goal-wards. Successive wins (steps) build and form new habits which will make the journey easier as you go
Achieve your goal, enjoy your sense of achievement and use this to set new bigger goals and repeat the cycle
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