by Tiffani Bova
THERE’S GOLD IN THEM THERE HILLS
It was all too common of a question: “How can I grow my business?” I remember flying back from meeting with the head of a division of a Fortune 500 company, where I sat next to a CEO of a small textile company in Los Angeles, California. He had successfully built a $3 million business when opportunity came knocking. He ended up selling his business but has remained CEO. The new “owner” wanted him to be 100 percent focused on acquiring new customers and driving top-line growth. He tasked the CEO to become an authorized (online) vendor for both Walmart and Amazon, which he did, while they worked on updating their website. That was its short-term growth strategy.
I wanted to learn more. I started with the basics, asking how many customers they had (i.e., how many have purchased from him at least once). He answered with, “Over one hundred thousand.” I tried to dig deeper. I asked how often these customers made purchases, what the average order size was, what the top source of new customers was, and what it cost him to acquire a new customer. He was a bit perplexed by all the questions about his existing base of customers—he thought that the fact that they were available on two of the largest online marketplaces in the world was far more compelling of a conversation to have . . . but he couldn’t have been more off the mark.
There may have been a time when “build it and they will come” would have been applicable to online businesses. Today, it is no longer so. Build a website, build a product, build a mobile app—you pick—whatever it is, I’m guessing there are hundreds or even thousands of alternatives to choose from. The context of the market has shifted. With the increased level of competition across countless industries and product categories, businesses in every sector are struggling with ways to attract and acquire new consumers. Complicating matters is the fact that many are finding that increasing customer acquisition costs (CAC) are making it difficult for companies to compete against others with larger advertising and marketing budgets—or even maintain the pace of new customer acquisition they have seen in the past.
Start-ups, small businesses, or large enterprises, it doesn’t matter—nobody is immune to these new realities. For example, in 2013, it cost Netflix around $45 to acquire a customer in the United States, roughly what it costs to acquire an international customer today. But that number steadily rose throughout 2014 and 2015, followed by an explosive increase over the past year and a half. Over the trailing twelve months (2016–17), Netflix spent more than twice as much to acquire a U.S. customer as it did four years ago.
Over the past five to ten years, CAC has become an important metric to track, especially in the “as-a-service” business model or a start-up looking to attract investors, but many get so fixated on it that they forget the value of a customer once the customer actually buys from them. Rather than thinking only about how you can acquire a lot of customers, and how cheaply you can do it, you should be thinking about the lifetime value (LTV) or customer lifetime value (CLV) across all of the customers you already have. The change in market context means that companies should be thinking more broadly when it comes to uncovering new growth opportunities.
That brings me to a hidden tension within this growth path. All too often, sales and marketing executives are trapped by management’s mandate to grow the (net new) customer base, with little concern for the potential imbalance of focus that brings for existing customers. Where companies allocate sales resources and marketing dollars can be a contentious process. And if you over-allocate toward acquisition programs, and not up-sell, cross-sell, or loyalty programs, you may actually end up alienating your existing customer base.
If you’re not careful, ignoring your customer base will lead to a growth stall. If you gain a customer through your marketing efforts but lose one you already have—because you weren’t paying enough attention to the customer—then you end up with the same number of customers but with lower profitability. Why? Because it costs far more to gain a new customer than to keep an existing one. With the ease of “switching” for customers (both in cost and time), spending money to acquire a customer (CAC) may never be recovered.
Winning a customer (once) and keeping a customer buying from you again and again are two very different things. According to a Bain & Company study, 60–80 percent of customers who describe themselves as satisfied do not go back to do more business with the company that initially satisfied them. This translates into the fact that although companies are spending more and working extremely hard to acquire customers, even satisfy them, they fail to capture any repurchase opportunities after the fact. What a shame.
The likelihood of success is exponentially higher when selling into the base than capturing new customers altogether, especially if it is for the same or similar products. The typical probability of selling to an existing customer is 60–70 percent. The probability of selling to a new prospect is 5–20 percent. While it may be a no-brainer, it also makes it a safe choice because it provides a potentially quick fix to what is often a more complex problem hidden behind the safety of current success.
One of the biggest untapped opportunities is understanding CLV (what customers are likely to spend with you in the future) and leveraging its additional revenue potential to fast-track your business growth, especially when facing a growth stall. Strategies to increase sales from customers you already have are as important as what you do to acquire new customers in the first place. In fact, these strategies may prove to be more critical for your long-term success. Why? Repeat customers, on average, spend 67 percent more than new customers and it’s easier and cheaper to sell more to current customers than to try to gain completely new customers.
That is why if you choose to pursue the Customer Base Penetration path with a focused and orchestrated effort, you can find additional growth opportunities with a reduced acquisition cost, further establish customer loyalty, and keep your competitors from stealing them away. Acquiring or “landing” a new customer is one way to grow—but landing them and then “expanding” how much they spend with you going forward is another. That is the heart of the Customer Base Penetration path.
This path happens to be one of the least risky of the ten, because at its core it is about working with the customers you already have. While it brings less risk and has a higher likelihood of success, that doesn’t mean you stop everything else you’re doing and double down on the Customer Base Penetration path.
The Achilles’ heel for maximizing the growth potential with this path is twofold: one part is having enough data and the other is actually having a good-size customer base to penetrate. In the previous story of the textile company, he had more than enough customers to pursue this growth path, but what he didn’t have was clean and accessible data on those customers, which is why he was forced to go after net new prospects instead of mining what he already had acquired.
With the advances in technology, specifically customer relationship management (CRM) software (such as Salesforce.com and others), companies are now able to capture vast amounts of customer data. You have to know your customers (potentially more than one contact in an account), know their purchasing habits, identify products or services customers could buy but don’t, and be able to share that data with the appropriate resources (i.e., sales, customer service, and marketing) to further sell into the existing base. This information can also help define what the ideal customer for net new acquisition may look like, which could help reduce CAC.
This is also about knowing who your customers are so that you can find more like them, especially if you want to pursue Market Acceleration in combination with Customer Base Penetration. This path makes the assumption that you actually have a viable and sizable customer base to penetrate and grow from, either because you are creating it (first mover) or you are attempting to take share from someone else. Without a set of customers to work from, or a product category, industry, or customer base that is growing, this path is a nonstarter for you. You m
ust ensure that you are not wasting your time or spending too much money to acquire customers if there isn’t enough growth to be had. If that is the case, you may want to consider waiting to pursue this path until you have the right elements in place for success.
STORY
1
RED BULL
A THAI PHARMACIST AND AN AUSTRIAN ENTREPRENEUR WALK INTO A BAR
We don’t bring the product to the consumer, we bring consumers to the product.
—DIETRICH MATESCHITZ, cofounder and CEO of Red Bull
A THAI PHARMACIST AND AN AUSTRIAN entrepreneur did meet one day back in 1984 (just not in a bar) in Thailand, when the Austrian toothpaste salesman Dietrich Mateschitz was searching for a remedy for his jet lag. As luck would have it, pharmacist Chaleo Yoovidhya suggested a local sweetened energy drink called Krating Daeng, Thai for Red Bull, which had been invented in the 1970s.
People have been using various beverages to feel that extra burst of energy for centuries. Over time, trends have changed from tea, to coffee, on to soft drinks, and back again. But just as people throughout time have sought something more powerful than caffeine, they now seek soft drinks with additional energy-boosting chemicals. Enter Red Bull. From 2008 until 2012, the energy drink market grew 60 percent, totaling $12.5 billion in U.S. sales by 2012. As founder Mateschitz has said, “If we don’t create the market, it doesn’t exist.” That’s a good place to be.
It was originally developed as a non-carbonated refreshment for factory workers and truck drivers to keep them awake through long shifts, and it had become a huge success in Thailand thanks to its careful sponsorship of boxing matches and sports events. But it wasn’t until Mateschitz tried it and realized that if he transformed Krating Daeng from an obscure local remedy for sluggishness into a more universal concept, he could create an entirely new beverage category. He wrapped the drink in a blue and silver can, slightly modified the logo, and then wrapped that can with an eccentric and highly effective marketing campaign.
Despite its huge popularity today, Red Bull was not an instant success. It sold fairly slowly in Eastern European markets after its launch, but it wasn’t until the company expanded (Customer and Product Diversification and Market Acceleration) into the United States in 1997 that the drink became a runaway success. It’s now a leading name in energy beverages, with over sixty-two billion cans sold annually worldwide.
Red Bull GmbH launched in Austria in 1987. The company reworked the original Thai drink’s recipe (Product Expansion), reducing the ultra-sweet taste of the original and carbonating it to better suit the taste of the Western audience it was going to be marketed to. Since then, Red Bull has become synonymous with energy drinks, a category it (in fact) created, and is one of the biggest names in the soft drink industry today. Just as some people refer to colas as “Cokes” or copying a piece of paper as “Xeroxing,” or searching on the Internet as “Googling,” many refer to all energy drinks as just “Red Bull.”
ATTACK FROM THE EDGE
The rivalry between Coca-Cola and Pepsi is legendary, so much so that the decades-long battle has been dubbed the “cola wars” for its never-ending jockeying for market leadership. The battle began in 1886, when John S. Pemberton developed the original recipe for Coke. Twelve years later Pepsi-Cola was created by another pharmacist named Caleb Bradham. Throughout the years both drink titans have fought against each other using celebrities in their marketing campaigns, adding new flavors and recipes, new packaging, and exclusive partnerships—to name a few.
People who drink either Coke or Pepsi are loyal customers to a fault—they wouldn’t think of switching, especially to the “other guys”—until a newcomer entered the carbonated drink market, shunning all traditional advertising tactics and using word of mouth to attract new customers. Unlike the age-old PepsiCo versus Coca-Cola competitions, Red Bull created an “energy drink” and, by extension, an “uncontested market” where no one else offered a similar product. This meant that it didn’t need to concern itself with adjusting what it was doing to meet the changing needs and budget of current customers, or expand its product line one iota to compete with someone else, or deal with a growth stall—all it needed to do was to keep doing what it did best. In this case, it was the mixture of attracting customers to its brand via unorthodox means (student brand managers, consumer educators, attaching itself to sporting events and teams), coupled with a keen understanding of its likely buyer, which created the perfect storm for growth. This allowed Red Bull to dominate the category it created between 1984 and 2002 and capture the majority share, globally, that both Coke and Pepsi continue to chase with their own energy drink brands.
During this time, no one else was fighting for Red Bull’s customers so it enjoyed explosive growth because it pursued Customer Base Penetration in its home market for its first five years. It followed up with the Market Acceleration path when it expanded outside its home market (Austria) in 1992. The sequence of growing close to home, learning and developing a strong brand awareness, and gathering an extremely loyal customer base prior to branching out helped it accelerate its growth in new (regional) markets quickly. Had it attempted to go global right out of the gate, I suspect it would have had very different results; it might have overextended itself, resulting in supply-chain issues (sales but no products to ship), and alerted (future) competitors of the high growth opportunity that energy drinks would bring. Remember, for all intents and purposes, other “carbonated soda brands” weren’t even paying attention to what Red Bull was doing.
As I’ve mentioned before, it is often the case that big incumbent brands get so caught up in their own success or focusing on competitors that they don’t pay attention to impending customer and market (context) shifts. The result? They ignore small, unknown companies that play on the “edges” of their product category and sometimes, as in this case, end up in a fight they weren’t expecting or even anticipating. Even though in 2011 Red Bull only had a market share of 1 percent in the U.S. carbonated soft drink segment, it controlled 44 percent of the exploding energy drink market and was selling 4.6 billion cans a year.
Red Bull is now focused on Customer and Product Diversification, in combination with the other paths it has been pursuing. Had it diversified its products too early, it may have alienated its loyal customer base. Still to this day, the newly introduced Red Bull flavors are secondary to its original. The combination of unconventional marketing, strategic partnerships, simple product lineup, clear brand distinction, and significant customer engagement has proven to be too compelling for its competitors to replace it as the global leader in the energy drink category.
KNOWING YOUR CUSTOMERS
Remember, if you are going to pursue the Customer Base Penetration path, you must know and understand your customers intimately—what they like as well as what they expect from you. There is no question that the success Red Bull has achieved has been a direct result of the deep understanding it has of its customer base. From the beginning, Red Bull leveraged its eccentric advertising and marketing campaigns to target the action- and adventure-oriented customer and Generation Y males, age range of eighteen to thirty-four. It did so by being extremely focused on those “buyers,” meeting them in the places they frequent, such as school campuses and extreme sporting events. Over the years it has become the premier title sponsor of action sports such as Formula racing—even owning its own Formula One racing team—snowboarding, cliff diving, and dirt bike racing, and has formed big alliances with NASCAR, to name a few.
Without spending millions on one-to-one customer acquisition campaigns, Red Bull’s marketing and emotional branding strategies have created meaningful and enduring bonds between consumers and the brand—it’s in their DNA, and it’s what its customers expect. Red Bull’s success has come not through convincing customers to drink it but through creating a reality in which the customer wants to be part of the “Red Bull lifestyle.”
BRI
NG CONSUMERS TO THE PRODUCT
It would be fair to say that Red Bull never sold a product. They still don’t. They sell an image, with lifestyle-oriented branding and social media input, and just casually make the product part of that image. For over two decades “Red Bull gives you wings” has been its slogan, but after it settled a $13 million lawsuit, we all learned that Red Bull does not, it turns out, actually give you wings, even in the figurative sense. Regardless of the lack of scientific proof of its claims, its image remains and has allowed Red Bull to charge a premium over regular “cola,” sometimes even twice the price.
Red Bull had first-mover advantage, building an uncontested “beachhead” that others would have to displace if they wanted to “steal” its customers. It wasn’t until Rockstar Energy Drink came on the scene in 1999 and Hansen Natural Corporation launched Monster Energy in 2002 that Red Bull found itself facing any serious threats. PepsiCo didn’t get into the energy drink market until 2013, when it launched Mountain Dew Amp. Coke waited until 2014 to launch Full Throttle, which in 2015 was purchased by Monster Beverage Corporation. Let’s put those dates into context: Red Bull launched in 1987, which means PepsiCo and Coke gave, yes, gave, Red Bull a twenty-plus-year head start.
Which is why, with its leading market share and deep brand loyalty, Red Bull stayed on the Customer Base Penetration path for well over a decade as it dominated Europe, before it decided to jump to its next path, Market Acceleration, as it expanded geographically.
With the market for energy drinks growing, it took almost another decade before it moved on to the Product Expansion path, when it added additional flavors plus low calorie and low sugar alternatives. Adding new flavors was a natural next step for the Red Bull brand, Amy Taylor, vice president of marketing, told USA Today. “Taste is a barrier for the category, and taste is a barrier for Red Bull. After 12 years in the U.S., we can now introduce flavors without confusion. It’s about expanding the consumer base.” Red Bull chose the right sequence—by not initially over-diversifying or diluting its brand, or what its customers appreciated about it—all in the name of chasing new customers with too many new products. Remember, when considering if Customer Base Penetration is right for you, the market you are pursuing must be growing; otherwise you risk wasting time, money, and resources on the wrong growth path. In this case, Red Bull is in the driver’s seat of a growing segment. The global energy drinks market is expected to reach $84.8 billion by 2025.