There’s a common misconception out there that the key to scaling your business is just getting more customers. I think it’s out there because it’s a pretty common mindset for entrepreneurs.
I know I felt like that at first.
When I started scaling my first company, all my efforts were focused on getting more customers through the door.
After all, you need money to keep your business going. And the easiest way to get more money is by getting more customers.
But this kind of short-term scope is like an addictive poison for your business. It keeps you on a perpetual loop of struggling.
You’re always searching for ways to get more and more people over the line…
Unfortunately, this can lead to a lot of problems in the long-term, namely:
- poorly built offers
- broader, less effective targeting, and
- less impactful products
Why? Well, specificity is the key to great product/market fit. If you try to appeal to everyone, you’ll end up appealing to no one.
So how do you go about scaling your acquisition efforts in a sustainable, profitable fashion?
You’re about to find out…
Welcome to Part 1 of the Scaling Customer Acquisition Strategy Series; Your guide to “going negative” with confidence.
(Hint: Not sure what I mean by “going negative?” You must have missed out on last week’s introduction post. Here’s a link—you should go read it if you haven’t yet.)
This week we’re going to tackle one of the foundational aspects of scaling: identifying your target audience.
We’ve got a lot to unpack, but first, let’s start by looking at the relationship between acquisition and retention, and how entrepreneurs get it wrong.
The Relationship Between Acquisition and Retention
In last week’s article I said…
“The success of your business depends solely on your ability to acquire and keep customers”
You’ll notice that there’s 2 different strategies tied up in that statement: acquisition and retention.
That’s very purposeful.
Your customer acquisition strategy should have retention at the forefront.
Here’s what I mean…
Typically, when a business measures acquisition, they use metrics like number of lead captures, conversion rates, customer acquisition cost, etc.
These metrics are important, but they tend to limit the scope to the moment of impact (aka the moment a stranger becomes a customer.)
Retention on the other hand is all about getting current customers to hang around.
When people try to measure retention, they use metrics like churn and retention rates, mean recurring revenue (MRR), and finally customer lifetime value (more on this in a minute.)
These metrics give you a broader scope and a better understanding of how your customers behave after they convert. And post-purchase behavior will become far more important when you’re trying to build long term-sustainable growth.
The 80/20 Rule
Th 80/20 rule was an observation coined by engineer, economist, and overall thinker Vilfredo Pareto (which is why you’ll also see it come up as the Pareto Principle in google.)
It can be summed up by saying for any task, about 80% of the results can be attributed to only about 20% of the efforts.
Why am I bringing up the musing of a man who’s been dead for over 90 years?
Well, the applications of Pareto’s observations have changed the way we think about sales, investing, process management, wealth distribution, and even…. marketing.
In the case of marketing, we relate Pareto’s observations with customer purchase behaviors.
~80% of the purchases made in your business come from about ~20% of your customer base.
If you pull one thing from this article, it should be that statement.
This realization changed the way business leaders like Peter Fader, Sarah Toms, Perry Marshal, and many, many more think about their customers, and their overall acquisition strategy.
Who’s Actually Your Ideal Customer
Here’s a graphical representation of how the 80/20 rule applies to your customers.
If you were to calculate the Customer Lifetime Value (CLV) of all of your customers and graph the distribution of those different values (aka, create a spread of how many customers had each different value), you’d end up with a bell curve that looks a lot like this one.
So what does this graph tell you?
Well, as you can see, not all of your customers are equal in value.
Some customers buy the entry point offer, but never ascend. Those customers have a low CLV, so they make up the first quartile on the far left of this graph.
A large majority of your audience will fall within your average. This means that they all stick around for a pretty similar amount of time (maybe the take your entry point offer, and your core offer, with the occasional upsell offer) so they have similar CLV’s.
This cohort is the group that most businesses are trying to attract. They are what I call your average Jane/Joe customers. They stick around for a while, but don’t have the money or time to take your more substantial high-ticket offers.
However, most businesses are sitting on a not-so-obvious goldmine….
In the 4th quartile, you’ll find a group of customers with higher than average CLV’s. These are the raving fans who seem to have nothing better to do with their time or money than buy your products.
When it comes to scaling, this is the group you should be focusing on.
When to Shift From Average To Ideal Customers
So, when a good entrepreneur first starts to sell a product, they identify their target audience. These are the people they think will see the inerrant benefit of the product and buy.
Going after this group is an important step in building your foundational audience.
But if you’re already established in your business, at some point you’re going to get to the bottom of the barrel when it comes to acquiring new customers within that segment.
You’ll know you’ve gotten to this point when you start to see your customer acquisition costs rising on a relative basis (remember what I said in last week’s post about your marketing team asking for more budget?)
This is because it becomes harder and harder to seek out those customers.
When you get to this point, it’s time to start looking at how you can leverage that goldmine of customers living in the 4th quartile of your CLV bell graph.
And that’s exactly what we’re covering in next week’s post.
So make sure to check back next week for part 2 of the scaling customer acquisition strategy series. We’ll dive into developing a customer acquisition plan based off your customers buying behavior, and each segments acquisition cost, so you’ll be able to allocate your marketing budget with confidence.