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Driving Repeat Business Part 1: Critical Success Factors

August 2002 Marketing

Lather, Rinse, Repeat…Lather, Rinse, Repeat…Lather, Rinse, Repeat… We don’t just buy one bottle of shampoo in our lifetime. Likewise, we shouldn’t expect our customers to buy just once from our companies.

Business-to-Business companies are increasing their focus on repeat and referral business. In many instances, this is a sound strategy in which to embark, but not for all businesses. Like all other issues in generating revenue, repeat and referral business isn’t a one-size fits all strategy. There are some critical factors that should be considered in embarking upon a marketing plan to improve repeat and referral business.

Repeat and referral strategies are a sub-topic of more general Customer Retention strategies. Customer Retention is well known to be much cheaper than Customer Acquisition or the capture of new customers. The focus of Customer Retentions strategies is to improve the share of business coming from the existing customer base. Customer Relationship Management is at the core of repeat and referral strategies, but CRM software is often not required. Rather, what is required is a sound approach to improving the existing customer relationships.

Repeat and referral strategies can be deployed in a number of B2B industries. Obviously, if a company is selling consumable commodities, repeat business is a core focus of the revenue engine. But these strategies can also be used in other industries with more complex and differentiated products. ADP Dealer Services and SunGard Data Systems are both successfully using this strategy to drive customer penetration in selling suites of products to existing customers. Alternatively, venture capital funds and portfolio managers will request existing investors to increase the amount of principal within their fund, an indirect form of increase share-of-wallet.

The critical factors that determine the expected success of a repeat or referral strategy are dependent upon the target market and product/service on offer. These factors also affect the tactics to be deployed in embarking upon customer retention strategies. While this article will focus on criteria to determining the expected success of an increased focus on repeat and referral business, the next few articles in this series will focus on some successful tactics to drive improved repeat and referral business.

Three of the most critical factors in determining the ability to succeed in repeat business strategies are: (1) Size of Customer Base, (2) Transaction Decision Frequency, and (3) Ability to Cross-Sell and Up-Sell.

Size of Customer Base:

Obviously, if a company has no customers it cannot embark upon a repeat business strategy. The logic of this boundary statement can be extended to companies with 20 years of experience and a thousand customers as well. A myopic focus of marketing activities on past customers is a way to decrease the size of the target market. Running a business from a critically small target market puts a business in a precarious position. If a few members of this critically small target market undergo normal dynamics, such as acquisition, bankruptcy, or management changes, the revenue accessible portion of the target market may become too small to support an ongoing concern. As such, a business with a high focus on improving revenue through repeat business can only expect success from this strategy if their current customer base is sufficiently large.

The question being raised is: Does the business have a sufficient customer base to warrant the expectation of sufficient revenue through mining the current customer base? If not, the business will need to either downsize or continue to have a significant sales and marketing program directed to new customer acquisition. A type of business which will clearly succeed with a customer retention strategy is one in which the market is somewhat stagnant and currently dominated by a limited number (2 to 5) major players. Other businesses that can benefit from a strong customer retention strategy are those in which the market is highly fragmented yet the company’s current customer base is sufficiently large.

Transaction Decision Frequency:

The value of customer retention strategies is somewhat dependent upon the frequency in which the customers select to purchase from a product/service category.

Companies selling subscription based products and services, such as telephony service and outsourced software application service, may have a large portion of repeat business, but that doesn’t imply that revenue can be dramatically increased through an improved emphasis on repeat business. While these types of products/services are continually consumed and purchased, the purchasing decision is reviewed infrequently. For subscription based products and services, or annuity style revenue sources, customer retention strategies may firm up revenue, but they will not increase revenue. The current customer base is fixed.

Rather, revenues increases through a repeat business strategy require that past customers select anew to purchase. For instance, if a company has sold a system implementation project or a graphic arts project once to a customer, then that company should expect to gain revenue by re-connecting with that customer and selling a second systems implementation project or a second graphic arts project. Here, the issue is turning a one-off sale into a repeat customer sale.

At the core of this issue is the frequency in which the customer makes a buying decision. If your product/service represents a major capital expense, such as a multi-million dollar software and hardware project where the end product has an expected lifetime of four or more years, then it should be expected that the customers will not be in a position to re-purchase that product from your customer for many years into the future. For these products, service contracts may represent a more significant revenue stream from the existing customer base.

Cross-sell and Up-Sell

Many of the most successful companies in the high-tech community have learned the art of cross-selling and up-selling.

ADP Dealer Services for the automobile dealership industry and SunGard Data Systems for the financial services industry have multiple products to sell any customer within their install base. Their strategies rely upon selling a single point solution to a customer’s requirements, then finding a second problem within that customer that can be solved by another product within their suite. For companies with multiple products aimed at the same industry, cross-selling to the existing customer base represents a significant stream of revenue.

Other companies, such as SAGE in the CRM area with ACT, MAS 90, and SalesLogix, provide a nice example of executing an up-sale strategy. As customers outgrow their low-end product, ACT, they become key customers for their enterprise product, SalesLogix. Companies executing an up-sale strategy often have created or acquired a product suite to form the basis of a “Good, Better, Best” offering.

While the above examples of firms practicing cross-selling and up-selling are each producing revenues in excess of $100 million, these strategies can also be implemented in smaller firms. The requirement for practicing up-selling and cross-selling isn’t with regards to the firm size, but rather in regards to the product suite and its focus on a single market. Having multiple products or services that can be purchased at different price points provides the basis for a successful cross-sell/up-sell strategy.

Closing

While other factors will need to be examined in regards to assessing the expected success of increasing revenues, size of customer base, transaction decision frequency, and ability to cross-sell or up-sell are some of the most critical determinants. In our following articles, we will examine some of the successfully tactics to implementing a repeat and referral business strategy.

The May Report, TECH BUSINESS BRIEFS, Aug 21 2002

vCapital, Sept. 2002



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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