I’m currently in the middle of reading Company of One by Paul Jarvis. It’s a pretty good read so far, and he talks about thoughtful, intentional growth being a workable model for a small company. That’s definitely an idea I can get behind, and one we try to live by at Read Modify Write.
But Jarvis also hints at the idea that you don’t need to focus on acquiring new customers to grow your business. Instead, he suggests you can increase profits by selling to your most loyal customers – those that only buy from you or like your brand the most.
He’s not alone in thinking this. The idea is everywhere. Here’s a snippet from an email I received from Mailchimp’s agencies newsletter entitled How to Help Clients Focus on Their Best Customers:
While the term “customer centricity” has been interpreted in many ways, at its core, it’s the idea that businesses provide customers with an exceptional journey. This, in turn, increases customer loyalty and retention—and catalyzes profitable growth.
One of the most pervasive ideas in marketing is that you can grow profits by targeting your most loyal customers. I guess, superficially, that makes sense. Acquiring new customers requires marketing, and marketing is expensive, so why not get the people who’ve already bought from you to buy again? Targeting your existing customers is cheaper and therefore more profitable.
At least, that’s the theory.
Growth Via Market Penetration
The only problem is that growth through loyalty is a myth. The entire debate was put to rest in Professor Byron Sharp’s seminal work, How Brands Grow.
Professor Sharp provides reams of data and case studies tracked over years to show that, as a rule, brands grow by focusing on increasing market penetration (how many customers purchase at least once during a given period), not focusing on loyalty. Larger brands inherently have more loyalty because loyalty is a function of their market share. So as you grow you get both new customers and some of your customers become more loyal.
This is explained by the NBD-Dirichlet, or the long-tail, distribution: a mathematical model representing buyer behaviour.
In general, brands have a few heavy buyers (people that make repeat purchases) and many more light buyers (those that by infrequently). The shape of the pattern modelled by the NBD-Dirichlet distribution holds regardless of market share size.
The Silicon Valley Obsession with Customer Acquisition
Silicon Valley culture is obsessed with acquisition rates, especially for SaaS companies. That’s because SaaS companies incur high Customer Acquisition Costs (CACs), which are only offset once those customers have continuously used the product for a while.
That means as more customers sign up the CACs actually increase. However, the faster that happens, the larger the user base grows, and the more profitable the business becomes once the initial expenses are covered.
Granted, it’s possible to have an unhealthy obsession with acquisition rates. If you’re incapable of retaining most of the users you worked so hard to acquire, it doesn’t matter how fast you can get customers: you’re going to burn through your money faster than you can say “Silicon Valley unicorn”.
And Jarvis makes this point eloquently in Company of One. Acquisition at all costs can hide real problems. But it’s an overcorrection to shun new customer acquisition entirely.
The truth is that focusing on market penetration is the way to systematically grow your profits. It’s as close to a marketing law as we’re ever going to get.
Company of One by Paul Jarvis shows it’s possible to run a small business that’s not obsessed with growth