This is a guest post by Nicole Taylor from Home Business Online Opportunities.
Have you ever heard the expression that eighty percent of your business should come from twenty percent of your customers? This is not an equation I am pulling out of thin air. It is an established business theory and the home businesses that follow it tend to be the home businesses that flourish.
Home Business 101
If you have taken any business management classes, chances are you have heard the 80/20 theory. If you have not heard the 80/20 theory, then you definitely should have heard that it is easier and more profitable to keep an existing customer than it is to recruit a new one. Committing this fundamental fact to memory is critical to the success of your home business.
Misaligned Priorities
When you start your home business, your first goal is to drum up business. You market and advertise, then you advertise and market, then you do it again and again until you have a steady stream of customers coming in. Unfortunately, many home business owners do not know to jump off this train when they are supposed to.
Do not get me wrong, you should never stop marketing your home business. However, there will come a time when you will need to start taking away from marketing efforts and start focusing the energy and resources you have taken from marketing and put them towards the customers you already have.
What Is More Important?
Often, when a home business owner hears that marketing sometimes needs to take second place to customer service, they balk and question why. No, the person giving the advice has not gone insane and they are not trying to set the home business up for failure. They just realize a crucial fact. It is easier and more cost effective to keep an existing customer than it is to recruit a new one.
A Real-World Scenario
To understand exactly how the 80/20 theory came to be, let’s look at a real-life home business scenario. Let’s say John runs a business that details cars. He charges eighty dollars to detail a car and his overhead, including discount and incentive offers, equates to about thirty dollars per car, so John makes a profit of $50 per car.
Now let’s look at John’s advertising expenses. Each month John has a local pay-per-click search campaign running and this campaign costs him about thirty dollars a month. He also places first-time customer offers in the newspaper, which run him about three-hundred dollars a month. He also has ads in the local magazines featuring auto classifieds. This costs him another two-hundred dollars a month. All of this is done to draw new customers into the business so the total spent on bringing in new customers is about five-hundred and fifty dollars each month.
Let’s say John gets about sixty new customers a month from these advertising efforts. Since he makes fifty dollars off each one, the total income generated from the five-hundred and fifty dollar investment is about three-thousand dollars. That is an ROI of more than five-hundred percent. Not too bad. But let’s look at how much money it costs to market to existing customers.
John has an existing customer base of about fifteen-hundred customers. Of those fifteen-hundred customers, he has the email addresses of about half of them and the mailing addresses for all of them. Each month, John sends out about 750 emails and 750 letters offering returning customers a 10-percent discount. The emails cost him nothing to send. The letters cost him less than three-hundred dollars.
Each month, John takes in about 150 cars for detailing from the existing customers he contacted and profits about fifty dollars from each car. For an investment of less than three-hundred dollars, John makes seventy-five hundred. That means John is getting his investment back twenty-five times over. It does not take too long to figure out where John’s bread and butter is.
Treat Them Right
Because existing customers can be so valuable to your home business, it is important to treat them right. Customer loyalty is a dying concept, so you need to give your customers a reason to stay. Offering loyalty discounts, monthly offers and informative newsletters are excellent ways of ensuring your customers keep coming back and your income keeps coming in.
Copyright © 2007 - Nicole Taylor is founder of Home Business Online Opportunities. For more information please visit:http://www.homebusinessonlineopportunities.com
reash on August 15th, 2007 at 11:55 am
Very nice article. At first, I had a hard time figuring it out but got it all figured out by reading it three times.
kcdc627 on August 16th, 2007 at 6:52 am
Excellent article. Very well written and great information.
Thank you
kcdc627
http://cash4blogging.blogspot.com
FranchiseBrief.com on August 17th, 2007 at 9:37 am
Good article however, I would like to make something clear here. The rule is NOT “20% of your clients SHOULD make 80% of your business”. The actual 20-80 rule is to show the limit (danger?) of having 20% of your clients generating 80% of your business. When you reach this point, you become dependent on your customer, which means if they decide to go somewhere else, you’re pretty much screwed.
The 20-80 rule is a ratio that shows the danger of being too dependent, it is certainly not a ratio that all companies want to get to.
What you are talking about is building cutomer loyalty vs. attracting new customers. This has nothing to do with the 20-80 rule.
Gaining new customers cost about 5-7 times more than fidelizing existing ones, which is why so many companies now offer loyalty card (buy 10, get the 11 free or some type of reward to thank the customer for its loyalty).
Brian on December 17th, 2007 at 7:43 am
It was a very good article and being both a detailer and a businessman, I look for a balance of new and existing customers to keep the business growing and stable. It almost always costs more to obtain new business than it does to maintain existing business. Both costs need to be considered and actions to manage both have to be taken.