Profit margins refer to the percentage of revenue left behind after reducing costs, depreciation, taxes, and interest. Healthy profit margins are the heart of your business. Your business must be profitable enough for you to cover costs, reinvest, and carry on operations while satisfying your customers and employees, as well as various stakeholders.
We have broken down three tactical techniques which you can easily implement to keep your business profitable through higher profit margins from current customers and sales!
The idea is, to first and foremost, focus on your existing customer base. Customer acquisition is the act of gaining new consumers to drive up sales. Acquiring new customers is a tedious and difficult task for businesses, and customer acquisition strategies are expensive. The amount spent on acquiring new customers is considered against the value they bring to your business.
Most businesses see very low or negligible profit on their first sale due to high marketing, ad sales, and customer acquisition costs. Once all these costs are factored in, your profit margin is almost non-existent. Profit margins are generally driven not through the first, but the second and third sales.
“If somebody makes a purchase with you, that person is 10x more likely to make a second purchase with you; because now they inherently trust you.”—Allen Burt, CEO & Founder of Blue Stout
The Smart Way to Increase Profits
If you want to increase your profits, you need to focus more on your existing customers. You can keep reeling your customers back in for more purchases by implementing effective tactics and strategies.
One way to measure customer retention is through the repeat-purchase rate. Customer retention is an art. Retaining customers is no easy feat and needs more than just trivial efforts with customers getting smarter with the times.
Products must offer more regarding intrinsic and extrinsic value beyond high-quality manufacturing.
Why the focus on CLV?
If you are looking to sell your business, interested parties will look at your customer lifetime value (CLV) metric. The CLV is based on proper data analysis or documented buying behavior patterns and aims to
measure the value of a customer relationship against the forecasted cash flows, in monetary terms. The CLV can be an assumed net profit amount which the company will obtain through the customer’s purchases.
The recent shift in key metrics has forced companies to focus less on direct one-off sales and more towards building valuable customer relationships that keep generating profit. The attention given to CLV creates an upper boundary while limiting the expenses put into new customer acquisition, helping calculate the return from your advertisements.
Retaining customers is the most effective way of generating sales and increasing profit margins without losing customer loyalty. Here are three functional methods that you can put into action immediately to increase customer retention:
The Three Takeaways
- Increase focus on segmentation and personalization
- Reward loyalty by offering incentives
- Create a community, not an audience
Let’s break these down into executable actions one by one.
To begin understanding this method, you will first need to ask yourself,
“What do I do once a customer purchases from me?”
Commonly, companies will send confirmation emails, thank-you emails or subscriptions to their newsletters. But that’s where it stops and it shouldn’t.
Our BIGGEST Recommendation is to capitalize on the opportunity to create additional value for a customer segment, even if it takes more time and requires the structuring of multiple automated workflows.
The idea is to keep the ball rolling between you and your customer, keeping them engaged in your brand by asking for feedback and piquing their interest in up-sells and cross-sells, usually through email. Keep every customer in the loop by adding them to a cycle of further options based on their personal and segment-based buying heuristics.
Engaging you Customer
Companies like MailChimp can help create automated workflows which are sent once a purchase is made. Once the first task in the workflow is complete, the system will continue to build a relationship
with your customer. The segment-centered workflow will put them in different cross-sell and up-sell flows.
Bain & Company demonstrated that businesses experience a 95% increase in profit simply by focusing on customer retention and driving it up by 5%. Although the input may not seem like much, the output is a mind-blowing 95% increase in profitability.
A study by Adobe, in 2012, statistically showed why customer retention drives up sales and profit. The top 10% of your existing customer base can end up spending 3x more on every order than the average one-time customer ever would. The top 1% of your customers, on the other hand, is spending 5x more!
Why focus on Customer Retention
Reduced spending on customer acquisition allows firms to look into new and diverse sales channels which might have been unprofitable in the past, such as referral marketing.
Providing added value to a customer helps ensure the customers remain loyal to your brand and repeat customers end up spending 30% more on items per order than first-time shoppers. Customer retention reduces the need for continuous sales generation and drives down acquisition expenses, thus 2nd, and 3rd sales provide more towards the profit margin.
Creating Layers of Value
The primary method of keeping your customers engaged is through email, a well-known practice followed by everyone.
How are you adding value to your customer’s life?
You could opt to add another layer through specialization and personalization for your customers. Look through your product catalog and categorize your products by segments. Each segment purchase can lead the customer to a different upsell or cross-sell which they are most likely to buy.
For e.g., if a customer has bought guitar strings from you once, you can peg them in an automated workflow which leads them to cross-sells for products they are bound to buy, such as guitar bags, capos and tuners.
Customers that keep coming back to you are your most valuable asset; your relationship is based on trust which is why they make repeat purchases. Free capital allows companies to explore channels such as referral marketing, which were previously impossible to sell.
50% of consumers say friends and families were top sources of brand awareness – Raul Galera, Partner Manager at ReferralCandy
Recent years have seen a shift from traditional marketing strategies to cost-effective techniques such as
buzz marketing. When your customers genuinely appreciate the product you offer and its value proposition, they begin to promote and advertise your product and brand without any reservations.
Buzz marketing is the most effective way to market a brand as it depends on communication passed on from one trusted source to another. Rather than trusting reviews and strangers on the internet, customers are more likely to buy a product if someone close to them has referred it.
The idea behind referral marketing is to align a reward with specific buying behavior. These can be offered in the form of discounts or cash prizes every time you make a sale through a loyal customer’s referral.
“The best thing about referrals is that since they come from someone in your circle, they are very trusted opinions – you don’t need any more reviews!”—Raul Galera
Relevancy excites and invites
Make sure your incentives are in line with your products; offering 20% off on the next mattress bought isn’t really an incentive keeping its durability in mind. Incentives should not be like a distant ship on the horizon; they should be tangible and practical. Free gifts or cash prizes are tangible, can be seen and felt, the key is instant gratification!
Offering discounts on recurring product purchases allows you to open a communication channel between you and your customer and increases your chances of making a 2nd sale. Your chances will increase because your customer will perceive your value proposition to be higher than that of other companies. You can also offer money-back with every referral your loyal customers bring in. This brings results, even though it requires a lot of hard work.
Every brand has a mission or a reason for existing and selling. Your company’s reason ‘why’ can be leveraged. Focus on your company’s objectives rather than its products. You can use forums and social media sites such as Facebook and LinkedIn to create a community for likeminded people and customers who support your business because of its valuable objectives and beliefs.
A community is an easy way to increase your value proposition without putting in additional effort. Facilitate the creation of your community, which will become a place where existing customers can share their experiences, or new customers can ask questions.
You can invite customers to join the community with every purchase, and share their passion with other like-minded enthusiasts, creating an army of loyal customers who will increase your customer base by referring your company because of its high-value offer.
Your community should NOT revolve around your products. If you cannot define the ‘why’ clearly, customers will not invest in your company. You can generalize a topic around your specific needs by integrating different angles.