How to avoid attracting unprofitable customers

If the start of the decade was all about growth, it’s become clear as we hurtle towards the middle of the 2020’s, profitability is now the key focus for many businesses. Cheap money fuelled deep discounts to attract new customers, with little focus on if they’d stick around at full price.

As interest rates increased steeply post-pandemic and investment money dried up, not attracting certain customers is almost as important as attracting profitable customers you do want.

ASOS is renowned as a high growth company but had issues with around 6% of customers buying on discount and sending back a large volume of clothes. The fast fashion company said this cost them around £100 million annually – something they have now turned around by restricting buy now, pay later deals and reducing marketing outreach to this cohort of customers.

While attracting new customers is undoubtedly crucial for growth, not all customers are created equal, and the pursuit of unprofitable customers can be detrimental in the long run. Ultra-fast grocery delivery app Gorillas burnt through millions of euros a month, losing around €1.50 for every €1 it made in net revenue.

In this blog post, we’ll explore why it is essential to avoid attracting unprofitable customers with discounts and provide effective marketing techniques to attract full-paying, loyal customers. We will also discuss the importance of Lifetime Value (LTV).

The pitfall of deep discounting

Offering steep discounts to attract new customers might seem like a viable strategy initially, but it often results in several drawbacks:

1. Unprofitable customer base
   Customers who are drawn primarily by discounts tend to be more price-sensitive and less loyal. They are likely to switch to competitors offering better deals, eroding your profit margins.

2. Eroded brand image
   Excessive discounting can dilute your brand's perceived value. When customers come to expect discounts, they may be unwilling to pay the full price, making it challenging to maintain healthy profit margins. With frequent offers you’re essentially training your customer base to wait for the inevitable offer.

3. Financial strain
   Constantly offering discounts can put a strain on your finances, potentially affecting your ability to invest in innovation, customer service, or other critical aspects of your business.

The importance of lifetime value (LTV)

To truly understand why attracting profitable customers is crucial, we must delve into the concept of Lifetime Value (LTV). LTV measures the total revenue a customer is expected to generate during their entire relationship with your brand. By focusing on LTV, you can make more informed decisions about customer acquisition strategies.

Calculating LTV

To calculate LTV, you need to consider factors such as average purchase value, purchase frequency, customer retention rate, and the average customer lifespan. Here's a simplified formula:

LTV = (Average Purchase Value × Purchase Frequency × Customer Lifespan)

Techniques to attract profitable customers

Now that we understand the pitfalls of deep discounts and the importance of LTV, let's explore effective marketing techniques to attract profitable customers to your brand:

1. Targeted marketing
   Identify and target specific customer segments that align with your brand's value proposition. Tailor your messaging to resonate with these segments, highlighting the unique benefits of your products or services.
   
   
2. Content Marketing
   Invest in content marketing to establish your brand as an industry authority. Providing valuable, educational content not only attracts potential customers but also builds trust and credibility.
   
   
3. Loyalty programs
   Implement loyalty programs that reward repeat customers. These programs can be more effective in driving customer loyalty than one-time discounts. Take air miles - Tony Anderson, former marketing director of easyJet, once described British Airways Avios scheme as “the crack cocaine of frequent-flyer points”!
   
   
4. Personalisation
   Leverage customer data to personalise marketing efforts. Recommending products or services based on a customer's past behaviour and preferences can significantly increase conversion rates.
   
   
5. Exceptional customer service
   Offer exceptional customer service to create positive experiences. Satisfied customers are more likely to become loyal and share their experiences with others.
   
   
6. Partnerships and collaborations
   Explore partnerships and collaborations with complementary brands. This can help you tap into new customer bases without resorting to discounting.

Playing the long game

While discounts may seem like a quick fix for attracting customers, they often lead to the acquisition of unprofitable clients in the long run. By focusing on sales and marketing strategies that target profitable customers and prioritise the concept of Lifetime Value (LTV), businesses can build a sustainable future. Remember, in the quest for long-term success, quality and value should always take precedence over short-term gains through discounts.