4.04 – Analysing Customer Attractiveness
Creating an attractive market niche can be undermined by having the wrong customers. Attractive customers have a strong need for your offering, value the solution to their problem more than your product costs (creating a strong value proposition), have disposable income to spend on your offering, pay their bills on time, and exist in sufficient numbers to make your venture profitable.
Most business models have customers who are neither exceptionally attractive nor exceptionally unattractive. Generally, you don’t need to focus extensively on customer attractiveness because the mantra “all customers are good customers” holds true most of the time. However, studying customer attractiveness is still essential.
One prominent example of gaining attractive customers is the retail mantra “location, location, location.” An outstanding retail location attracts outstanding customers. For instance, a high-end retail mall has the same industry and niche attractiveness regardless of its location. However, the high-income customers available in a popular suburb are typically viewed as more attractive than those in rural areas.
Affluent customers don’t always make a market segment more attractive. While they can afford to pay higher prices, leading to higher margins, this may be offset by higher overheads and lower volumes due to exclusivity. Simply chasing affluent customers isn’t always the best strategy. Remember the old adage, “Sell to the masses, live with the classes. Sell to the classes, live with the masses.”
Consider the example of Rent-A-Center and Best Buy. Both are in the same industry with some niche overlap, but they serve significantly different customers. Best Buy serves customers who can afford to purchase a television outright, either with cash or pre-arranged financing like a credit card. Rent-A-Center caters to customers with lesser credit availability, extending credit to buyers deemed undesirable by traditional retailers like Best Buy. Rent-A-Center accepts monthly or weekly payments until the item is paid in full. Due to the differences in their customer segments, Rent-A-Center’s business model is significantly different from Best Buy’s:
- Best Buy serves a larger number of buyers who are more financially stable and operates with a traditional retail business model – buying and selling merchandise.
- Rent-A-Center functions more like a specialty finance company that sells appliances. It doesn't collect payment in full upfront, generating profits from finance fees, high interest rates, repossession fees, and more.
Many businesses might consider Rent-A-Center’s customers less desirable. However, Rent-A-Center has created a profitable business model that accounts for sporadic and occasional nonpayment.
As a businessperson, it’s crucial to eliminate or account for bad customers in your business model. In the construction industry, for example, slow-paying or non-paying customers can destroy a business. The wrong customers can undermine a workable business model.
Understanding Customer Niches Within Niches
You can have a customer niche within your primary customer niche. Your products are marketed to a specific segment or niche, but customers within any niche can vary widely. For example, Coach bags fill a niche between everyday bags and high-end luxury bags. Within this niche, you can find both Louis Vuitton customers looking for something more accessible and middle-class individuals seeking a touch of luxury.
The key question is which sub-segment your marketing is directed to. In the case of Coach bags, the marketing clearly targets middle-class buyers looking for everyday luxury.
Consider Starbucks as another example. Starbucks attracts affluent and desirable customers in the coffee industry. However, within the Starbucks niche, there are buyers who stretch their finances to buy a $5 latte and those who spend hundreds of dollars monthly. Starbucks markets to customers who view Starbucks as a lifestyle choice rather than just a place to buy coffee.
Additional Tips for Analysing Customer Attractiveness
- Conduct Customer Surveys: Gather feedback from potential and existing customers to understand their needs, preferences, and spending behaviour.
- Analyse Customer Data: Use data analytics to segment your customer base and identify the most profitable and loyal customers.
- Monitor Customer Satisfaction: High customer satisfaction can indicate customer attractiveness. Satisfied customers are more likely to return and recommend your business to others.
- Consider Lifetime Value: Evaluate the long-term value of different customer segments. Some customers may make larger, one-time purchases, while others may provide consistent revenue over time.
- Assess Payment Behaviour: Reliable, timely payment is crucial for maintaining cash flow. Analyse the payment behaviour of your customers to identify those who are financially stable and dependable.
By understanding and focusing on customer attractiveness, you can build a more robust and profitable business model that caters to the right audience, ensuring long-term success.
