Marketing Fundamentals

Customer Profitability Analysis

Through the help of customer profitability analysis, business owners, entrepreneurs, and marketing experts can closely monitor their earnings coming from each one of their customers. In simpler terms, it's the revenue accumulated per customer, excluding its costs and expenses. This allows the business owners to figure out which customers are providing more profit to the business. This is an analysis that should be used by any business, and you should keep reading to understand why.

In this video, I'll be using a Spa business as an example on how you can utilize customer profitability analysis. Wherein, we're going to walk through how to calculate the profit from each customer. After this evaluation, we will divide the customers into different segments according to the profit they bring to the spa. The prime customers in this study, or in other words the ones that bring more profit to the spa, although they're just 20% of the total customers, they generate as much as 80% of the profit.

For a business to be successful, this kind of information is a gold mine. When you know who your best customers are, you have your entire marketing strategy defined. You need to keep them coming back and find more like them. More often than not, business owners tend to ignore the fact that a small group of customers are the key for their business success, and on the other way, that they spend too much time and marketing dollars for a group of customers that don’t bring any profit to the company. 


Aside from that, during your customer profitability analysis you will learn the psychographic, geographic and demographic characteristics of your five stars customers. This info is going to be used to keep them happy by providing products, services and promotions that this group of people appreciate, and to create marketing materials to attract more like them.

This would also give you the privilege of knowing your other customers, aside from those in the 5 stars segment. This gives you the opportunity to work hard in order to convert the 4 or 3 stars customers into 5 stars. If you know who these good but not great customers are, you need to work on building a better relationship with them and utilize better marketing tactics, to bring them into your best followers group. This technique of focusing in converting your 'normal' customers into your 'best' customers it's usually the best practical route, since it's cheaper and more effective than trying to find a new set of customers.

Furthermore, another technique you can consider is to look for customers who have the same attributes and qualities that your target customers have. For instance, if your target audience are sales professional females living at a kilometer distance from your physical shop, and most middle-aged women, then you should consider reaching a group of audience that have some of these characteristics as well. It would be a waste of time and money if you'll promote your products to those who don’t have the same characteristics as the ones who love your brand.

Then for those customers who appear to be in your “worst” customers segments, it would be better to just leave them alone. There's no use of trying to transform them into good customers. And that is why I suggest you to spend some time analyzing your customers, this way you will know what to do in order to bring your business to the next level.

Direct Marketing

Direct marketing is a type of marketing that distinguishes from other kinds because of its two main defining characteristics. First, it attempts to send a personalized message directly to each customer and not a general message to all. It uses channels such as direct mail, e-mail marketing, or telemarketing. Second, it is focused on driving a specific "call-to-action." This aspect of direct marketing involves an emphasis on trackable, measurable analytics data of its results.

It is believed to have started in the year 1872 when Mr. Aaron Montgomery Ward, a Chicago-based business man, made a fortune by selling products to rural consumers through mail ordering. 

The big advantages of direct marketing is that it can be personalized, and its results can be measured. Since direct marketing gets detailed and personalized information into consumer's hands without any effort on their part, it is a very effective way to advertise. And, since you can customize the list of people who get exposed to your advertising, it is a very efficient way to use your marketing money as well. 

What you need to do in direct marketing is to create, or buy a good potential customers database. Only with a good database you will be able to achieve great results in your direct marketing campaign. 

Take this for example, if you plan a campaign to attract athletes to participate in the race you are organizing (marathon, half marathon, and 10 kilometer races possibilities), it would be great if your database had data on which ones of the list usually participates in a full marathon, which usually goes for the half, and what prefer a not so longer race and opt for the 10 kilometer option. This way you could segment your direct marketing campaign into three different campaigns: one targeting the 10 kilometers, other the half marathon, and the last one targeting the people that most probably will opt for the full marathon.


When you have contacted your potential customers, the following thing you need to do it is to measure its response rate. The response rate is the specific number of people who have taken action and followed your suggestion to either buy, participate, visit, or whatever was your main goal for creating the direct marketing campaign. If you have contacted 100 people to participate on an event and 10 of them actually show interest, you would get a 10% response rate.

Direct marketing is good for brands that are not yet strong. It helps in increasing brand awareness and sales. As you contact the potential customers directly you have the opportunity to explain them your product strengths and why they should buy it. This cannot happen if you use other marketing strategies, as you will not have the opportunity to go into detail about your product strengths, and because you may face similar products with a well know brand next to your ads.