Monday, 17 December 2007

The Law Of Diminishing Customer returns

In Wikipedia diminishing returns is also called diminishing marginal returns or the law of diminishing returns.

When applied to marketing and sales we get an interesting (and true proposition)…

The larger your customer database… then you will find that the average value of additional customers reduces…

I will put this another way… as you grow the sales of a particular offering then additional customers are probably worth less!!!

The average new customer is more price sensitive and less valuable than earlier ones...
The newer customer also tends to be less loyal than the existing customers... Typically your earlier customers are the one ones that find your offering the most valuable and may even pay more for it…

Why am I pointing this out?
Well, most growing businesses think that the early customers are the hard ones to attract and that later on everything will be OK. The Law of Diminishing Marginal Returns (which I believe I saw in my restaurant, sound recording studio and management consultancy companies) holds good for specific product sales – earlier customers are keener to pay more than the later ones… Its another variety of the Dip or Death Valley.

In growing, medium-sized businesses we often see:
1) Turnover growing but profit slipping as costs increase disproportionately...
2) The value of new customers often slips as well so you are trying to run up the ‘down’ escalator! (The Law of Diminishing Marginal Returns)...
3) For many, what’s really going on is that the cost of acquiring each new customer is rising (see the graph above). (Marginal Cost rise!)

A triple whammy!!

No wonder its hard!


Wikipedia on The Law Of Diminishing Returns
Valley Of Death Article in Growing Business Magazine (Nov 07)
The Valley Of Death - How Many Employees Should You Have? - Will Critchlow, June 07
My Valley Of Death blog article - Robert Craven, July 07
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