Don't Forget to Chase the Small Spenders Too

The minute you walked in the joint
I could see you were a man of distinction
A real big spender, Good looking, so refined
Say wouldn’t you like to know what’s going on in my mind?
So let me get right to the point
I don’t pop my cork for every guy I see
Hey, big spender! Spend a little time with me.

The lyrics of the song “Hey Big Spender,” written and sung by Peggy Lee are just so striking – and probably truer today in business than ever before. As competitive pressure increases, most companies look for better ways to serve customers and create loyalty, and these are admirable goals.

Two recent trends have led to the current situation. The first has been the growing desire of companies to create one-to-one relationships with their customers, getting to know them as individuals, and moving away from the mass-marketing approach. “Mass-customisation” and “mass-personalisation” are some of the current buzzwords used to describe the continual specialisation and movement towards serving market niches. Indeed, marketing guru Phil Kotler has said, “The riches are in niches.”

The second trend has, of course, been the ability to use information technology to gather, store and analyse much more information about customers, and to use this data to separate the wheat from the chaff. So, for example, we have seen a proliferation of “loyalty cards” whose main purpose is to give companies good information about who their customers are, how they buy, and what they care about.

Most experts encourage companies to identify and focus on the 20 percent of customers which account for 80 percent of profits. The logic is that if you focus on the profitable customers, and not pay too much attention to the rest in the long tail of the remaining, your business will be better off. Even we sometimes encourage our clients to “fire” customers who are unprofitable.

This strategy makes a lot of sense for many businesses. Some airlines, like SAS and British Airways have mostly successfully focused on business executives, and have even cut the space allocated to those annoying, wretched people who occupy the cheap seats at the back. Many South African banks, insurance companies, and others in financial services, have appointed special staff to look after their prestige, high net worth, individual “private” clients, in response to the competitive crisis in which they find themselves. If you gamble hard enough, you will also be treated as an MVG – a most valuable guest – and receive benefits from that private club.

Some businesses even go so far as to punish, (for example, with obscenely high service fees,) the little customers who bother the counter staff. Various frequent buyer programmes only reward customers who purchase products and services in large quantities. And there are also many other subtle tactics used.

For example, most call centers will encourage staff to get off the lines and move onto the next call as soon as possible, and, indeed, measure and reward the people who are efficient at this. “Special” customers are given various options such as specific numbers to call, specific people to talk to, and all sorts of attractive “freebies”. Better customers get better terms, such as when banks and credit card companies give a better interest rate for those who are in bigger debt, or manufacturers and retailers that offer larger discounts when purchasing in larger quantities.

Nobody will argue that these are good, logical short-term marketing tactics for companies which want to encourage good customers to buy more. But why do companies seem to find it so difficult to look after their small non-peak-time customers too? Especially when you consider that there may be some longer term flaws and traps in this strategy. These include:

First, your business certainly risks controversy and bad publicity if it refuses to serve less profitable customers. You may remember the debates that raged when a number of banks “red-lined” certain suburbs and certain individuals from mortgages.

Second, as a company sheds its less profitable customers, its fixed costs do not go away overnight, and these costs have to be spread over an ever-decreasing number of customers. Therefore, many of the better customers now become unprofitable too, so they also have to be fired, and so on until there are no customers left. You have to be very careful about where you draw the line that separates “good” from “bad” customers by looking at all the costs of doing business, not only the profit per customer.

Third, in any industry, (such as banking,) there are only very few highly profitable customers, and all are being chased by the same competitors. All companies target these same customers, with equal marketing vigour, and eventually end up paying more on marketing and retention than they would with the small man on the street.

Fourth, and this is probably the most compelling weakness of the 80:20 strategy, there will always be a smaller, hungrier, more efficient competitor who is more than willing to service the large chunk of customers who now start to feel neglected. The power of the internet means that efficiencies – and lower costs – have made it easier than ever before in human history, to offer customers better deals.

In the airline industry, Ryanair, and Southwest Airlines, have all shown that they can streamline their services, make them more cost-efficient, and still look after the unwanted and neglected customers better than the bigger companies. Capitec Bank, Outsurance, ChesaNyama, Pep Stores, Lewis and Shoprite-Checkers have also successfully used similar strategies to attract the cost-conscious customers.

Finally, you never know which of these small customers will turn out to be a big customer one day. Nothing lasts forever, and some customers vow to never do business with companies that rejected them at some stage when they were “nobodies.”

By all means, put some focus on your large, good and/or valuable customers, and do whatever you can to retain their loyalty. That makes good business sense. But also make sure that you have plans in place to effectively and efficiently deal with the small customers too, so that they don’t feel neglected. If you treat all your customers as big spenders, your business can only succeed.

Back to Articles and Resources.