Revenues and Profits
One of the questions I wondered during my VRM presentations was this: why were marketers not excited by the doubling of profits? Here was I giving them a theoretical construct which showed that just a 15% increase in revenue focused on their Best Customers could lead to a doubling of profits. The calculation was straight-forward: if revenues went up by 15 and gross margin was 60%, the additional 9 would add to EBIDTA. So, if the EBIDTA was 10% of revenues, the post-VRM EBIDTA would go to 19. Why would they not jump at this?
The only answer I could come up with was than marketers are tasked with a focus on revenue. Profits were not really their concern. And just a 15% revenue increase would not be seen as good. Marketers have many other metrics like new customer acquisition to worry about. In all this, the power of VRM to do ‘more with less’ is lost.
Any change would require an intervention by the business owner / CEO, who needs to therefore understand the value VRM can bring for the business. For a CEO, five themes need to come together:
- All customers are not equal. Customer value follows a power law. Some customer are much more important than others.
- A small change in customer value (even by 10-15%) for the 10-20% Best Customers can lead to a doubling of profits
- Therefore, as a business, the focus must be on these customers and creating differentiated experiences. This is where VRM comes in.
- To make VRM a success, multiple departments of the company need to work together. It is almost like creating a separate business unit focused on the Best Customers.
- The foundation to make all this happen is the combination of data and ML (machine learning). Data must be connected at every touchpoint and ML needs to be able to identify patterns which can guide marketing. The data flywheel is what will drive the profits flywheel.
It reminded me of what I had once told my team about email marketing. Focus on our top (enterprise) customers. And identify more ‘moments’ when they can send emails. If we could grow our revenue from the top customers by 10-20% by creating additional campaigns for their customers, it could give a big impact on the business profitability.
That is why VRM needs to become much more than a marketing initiative – it is a powerful weapon the CEO can deploy for boosting profits. By getting more from existing customers who have the highest spend, the business also takes away revenue and profits from competition – thus denying them the oxygen needed for growth. This can create a profits flywheel – Best Customers spend more because of the great experiences they get, which in turn can help beget more Best Customers (either from the Rest, referrals or targeted new customer acquisition), which in turn drives even more profits. This lays the foundation for building an invincible business – with the twin moats of extreme customer loyalty and maximising industry profits.
