Best Customers or New Customers?

How much should we focus on our best customers versus new customers?

Yesterday in discussing with a client which key metrics we should be tracking, we debated the importance of metrics tracking the brand’s best customers versus new customers.

How much should we focus on our highest value customers and how much to focus on new customers? That became a discussion on the learnings from the book How Brands Grow.

So this morning, I pulled out my copies of How Brands Grow and How Brands Grow Part 2 to refresh my understanding of their arguments.

One of the reasons I enjoy consulting so much is the constant learning and push pull from clients that challenge my thinking and force a deeper understanding. Here’s my latest thinking from my discussion and reread of the books.

The books are focused on brands which are largely bought in physical locations, which appeal to and are bought by mass audiences. The first book examples are often brands like Coca-Cola or categories such as laundry detergent, airlines, banks or fast food. The second book has a chapter on e-commerce which was written in 2016 and focused on selling through marketplaces and doesn’t contemplate DTC. It also has a chapter on luxury which serves to echo its prior arguments that awareness and physical availability wins.

The arguments of the book can be distilled to this:

1. The leading brands gain compounding advantages and the smaller brands face compounding disadvantages. Leading brands gain compounding multiple advantages over competitors in several ways such as the double jeopardy law (brands with lower market share have less buyers who are less loyal), retention double jeopardy (brands lose buyers proportional to their market share so smaller brands are lose a higher proportion). Also the Pareto distribution is more like 60/20 and not the conventional 80/20. Several other laws are discussed in depth in the book.
2. Therefore brands must grow.
3. Growth requires constantly adding new occasional and light users. It does not come through focusing on more purchases from the heaviest users because there are so few of them and it’s much harder than often assumed to get the heaviest users to buy more than often.
4. In consumers’ eyes, brands are slightly differentiated but largely interchangeable within broad categories and therefore brand switching is common and loyalty largely mythical. Behavior is more important so brands with the largest market share get bought more often at the expense of the smaller competitors.
5. Brand growth comes down to physical availability and mental availability.
6. Mental availability comes down to clarity, repetition and reach of message and can be improved with innovation and differentiation that stands out, but this is hard to execute.

The strategy has these 7 guidelines:

1. Continuously reach all buyers through physical distribution and marketing.
2. Ensure the brand is easy to buy i.e. physical availability along with clarity of messaging, pricing etc.
3. Get noticed.
4. Refresh and build memory structures to increase getting noticed, remembered and bought.
5. Create distinctive communication.
6. Be consistent. Yet keep it fresh and interesting.
7. Stay competitive and don’t give customers a reason not to buy.

The books are framed as refutations of much commonly held conventional wisdom in marketing. As a reader you will likely hold some of these beliefs and so the books are a refreshing challenge to your thinking. While the books and advice is clearly aimed at large, physical location focused brands, the books are important reads for brand leaders at small or scaling CPG brands and omni-channel focused brands who need that physical distribution and mass appeal to win.

But how applicable are the books to small DTC focused brands?

I think there are 4 key adaptations of the principles critical for small DTC brands that have repeat purchase dynamics. Again, this is not for brands seeking to grow primarily through physical distribution channels.

1. Growth is important, but less important than cash. For these brands, they should not think “How brands grow” but “How brands cashflow.”
1. The vast majority of these brands are never going to grow to market leadership or dominance.
2. They lack the budget necessary and unless the founder is embarking on a multi-generation journey, they lack the time.
3. These brands are less analogous to big “B” brands than they are to prominent stores in a desirable shopping district. They can dominate their locale and local clientele, but always run the risk of a competitor opening up next door.
4. The steward of the small “b” brand is the founder or equity holder whereas the steward of the big “B” brand is a hired gun. The hired gun just earns a salary. Whereas the brand founder and leader is chasing life changing wealth creation. That wealth creation can come from a big exit, but it has a higher chance of happening from steady cash distributions over extended periods.
5. Your highest value customers drive your cash generation through their high contribution profit purchases and easier to predict demand. Nurturing them and keeping them happy is critical.
6. Your new and infrequent buyers are important to keep refreshing your customer base and for growth, but acquisition must be done within your cash constraints which usually means first purchase contribution profitability.
2. Big “B” brands have rigid TAM’s whereas small “b” brands have fluid TAM’s.
1. The collective market for laundry detergent or cars is only so big. It’s largely zero sum where one brand’s win is other brands’ loss. In this world, brands must be focused on winning new customers because customer loyalty is weak but repeat behavior in the category increases the mental availability of the brand i.e. the more times I buy Tide, the more likely I am to buy Tide again.
2. But many smaller DTC brands play across more TAM’s. For example, a woman may be looking for a new pair of leggings in which case the brands is competing in the leggings TAM. But sometimes a woman is buying leggings because the purchase makes her feel good in which case the brand is competing for share of wallet against a casual dinner, a beauty product and putting more into her 401K. While these discretionary wins are awesome for the brand, it puts further strain on marketing. Should we be telling our story about why are leggings are the best to buy? Or should we be telling a story about how buying our leggings can make you happy?
3. The point here isn’t that new customer acquisition is not important for smaller brands, it obviously is. The point is that it’s not as important as it is for Big “B” brands.
3. The focus on physical distribution pre-dated the rise of DTC. But the concept of being easy to buy can be adapted for online to “be where the light and occasional buyers are” which would argue for being on Amazon and other marketplaces.
1. Certain brands e.g. luxury brands or brands where Amazon is rife with competition and IP theft need to weigh the value of increased ease of buying and sales with negative impacts of the channel.
4. The brands’ lack of ad budgets and the increasing expense of mass advertising channels like Meta mean the brands need to get creative in building their mental availability.
1. This increases the importance of distinctive and unique messaging that emphasizes free or low cost channels to expand reach. In other words, spend more time and effort on these programs and less time on running more ads.
2. Product launches must be marketing events that get wide attention with low dollars.

So back to the question of whether we should focus on our best customers or new customers. Given the goal of the brand leaders is to generate wealth and that the best way to generate that wealth is usually steady distributions over extended time frames with the possibility of exit and given that brands have limited distribution and customer acquisition budgets, it’s critical to maximize cash generation from our best customers. We do this through higher margin sales, lower marketing costs for returning customers and better inventory planning and cash cycling that their more knowable demand provides.

We know customers churn and we want to expand our customer pyramid, so adding new customers is critical for continued growth as long as we can do it profitably and support it with cashflow.

For our best customers, I like metrics that track contribution profit per unit by best customers and free cash flow as a percentage of net sales and current customer demand forecasting accuracy using an IRR to capture sales velocity. For new customers, I like metrics around new customers acquired as well as likely best customers newly acquired and fist purchase profitability. I will write more about specific metrics in future posts.